The Basics of What a Foreclosure Is and How it Works

I am amazed sometimes at how often I am asked questions such as “If this mortgage loan forecloses, then when does the lender get the property back?” or “Can you please tell the lender that I want to buy the property?” Whenever the law firm posts a property for foreclosure auction, the phone will often ring and some person will be on the line wanting to try to buy the property that is being foreclosed upon from the mortgage lender. These people literally do not understand that the mortgage lender does not own the property. The mortgage lender holds a lien against the property, but the borrower on the loan owns the property itself. So, if you want to buy the property, then call the owner, not the law firm representing the mortgage holder.

Mortgage lenders on seller-financed properties sometimes ask questions like “If I start a foreclosure on this property, then when do I get my property back?” This question makes no sense because the lender may never get the property back. The person asking it probably does not understand what a foreclosure is, how a foreclosure works, or how seller-financing works.  The lender can never be assured that the lender will get the property back. It is true that the lender gets to make the opening bid at the foreclosure auction (referred to as the “credit bid”). It is true that if no one outbids the opening credit bid, then the lender will be the winning bidder and will get the property back. But, it is not true that the lender will always or inevitably get the property back. A mortgage lender has no surefire way to “get the property back.” That right does not exist. Instead, the mortgage lender has the right to auction the property off on the courthouse steps (or such other area as the County Commissioner’s Court has designated for the foreclosure auction to occur). The purpose of the auction is to sell the property to the highest bidder so that the proceeds from the auction can go towards paying down the balance owed on the mortgage loan.

Many people know the term “foreclosure,” but they do not know what it means. A “foreclosure” is a public auction. Sometimes people say, “I do not want to auction off the property, I just want to foreclose on it.” This is nonsense. A foreclosure and an auction are the same thing. A foreclosure auction is a type of auction. Every foreclosure is an auction, but not all auctions are foreclosure auctions.

Seller-finance mortgage lenders often think that foreclosures are a process for “getting their property back.” Public perception of foreclosures can be that foreclosures are a process for mortgage lenders to seize and acquire back their collateral. This public perception is faulty and inaccurate. At a foreclosure auction, the mortgage lender typically makes the opening bid. The mortgage lender can open the bidding at the amount owed on the loan without paying anything out-of-pocket to fulfil the bid. Lender’s opening credit bids are often winning bids. As a result, public perception suggests that lender’s bids are always a way to get collateral back. Public perception is flawed. The fact that many lender’s opening bids are winning bids does not mean that all lender’s opening credit bids are winning bids. To understand why many lender’s opening credit bids are winning bids, one must understand the concept of “home equity.”

The “equity” in a piece of real estate is the difference between the value of the real estate and the amount owed on mortgage liens. So, if the house is worth $200,000 and the house is encumbered by a $100,00 mortgage lien, then the owner of the house, who is also the borrower on the mortgage loan, has $100,000 in “home equity” or just “equity” in the house. Most homeowners can do basic math. If their house is getting foreclosed upon because they cannot pay a $100,000 mortgage, but the house is worth $200,000, then the homeowner will just sell the house. The mortgage will be paid off when the house sells. The homeowner will pocket $100,000. Thus, the homeowner can convert his/her home equity into cash.

Many foreclosures are initiated, but not consummated. The foreclosures that are consummated tend to be the foreclosures on the properties with very little “equity.” When there is “equity,” the homeowner is motivated to capture the equity by either (a) selling the house, (b) filing a bankruptcy case or a series of bankruptcy cases, (c) refinancing the mortgage, or (d) working out a bankruptcy-prevention payment plan and foreclosure deferral plan with the mortgage lender. All of the foregoing would result in the cancellation of the initiated foreclosure prior to the consummation of the foreclosure. Due to the foregoing, the foreclosures that are consummated tend to be the ones involving little “home equity.” The pool of buyers that haunt the monthly foreclosure auction sites know that the high equity properties are the best to purchase. The high equity properties present the least risk to the foreclosure sale buyer. The foreclosure sale buyer often cannot see the inside of the house, which makes determining an appropriate bid very difficult. Because the mortgage lender opens the foreclosure auction bidding with a credit bid, because the consummated foreclosures tend to be the foreclosures on low equity collateral, and because the foreclosure sale buyer pool tends to have very little information on the condition of the inside of the real estate that is being auctioned, among other reasons, the credit bids often prevail. However, on high equity foreclosures, the credit bid goes from being likely to prevail to being unlikely to prevail (except, possibly, for unique and difficult-to-use property like expensive property, vacant land, or unique commercial property). Some counties have a much more active foreclosure sale buyer pool than others. For the foregoing reasons, the general public may have a perception that foreclosures are a process for the mortgage lender to “get its property back,” but the truth is much more complicated. The truth is that mortgage lenders often get their collateral back when there is little equity and a high credit bid, which tends to happen often because the high equity foreclosures with low credit bids tend to not consummate as often.

Sometimes mortgage lenders will say things like “Can I bid more than my loan amount so that no one else gets my property?” The answer is yes, of course you can. All the lender needs to do is bring cash or certified funds to the foreclosure auction. The lender can bid the full amount owed on the mortgage loan without paying anything out-of-pocket. This is referred to as a “credit bid” because in a credit bid no money changes hands. The balance owed to the mortgage lender must be paid to the mortgage lender from the foreclosure auction proceeds. Accordingly, the mortgage lender can bid up to that balance without paying anything in cash out-of-pocket because the funds would simply go to the lender anyways. The law does not require the doing of a useless thing. Accordingly, the lender does not need to pay itself. If, however, the mortgage lender bids more than the balance owed on the mortgage, then the mortgage lender must pay the overage in cash or certified funds. The lender needs to raise some cash and bring the cash or certified funds to the foreclosure.

What Happens to the Foreclosure Sale Proceeds Above and Beyond the Mortgage Lender’s Credit Bid?

The foreclosure sale trustee who conducts the public foreclosure auction at the courthouse or place designated by the County Commissioner’s Court will take cash or certified funds as payment at the foreclosure auction. The bidders must pay in cash or certified funds on the spot, without delay. If a bidder wins the foreclosure auction, but does not immediately pay in cash or certified funds, then the trustee will typically verbally void the auction and immediately re-auction the property to a bidder that is prepared to pay on the spot. The trustee will usually do this up until the deadline specified in the Notice of Trustee’s Sale until a winning bidder makes good on a winning bid.

The trustee then takes the foreclosure sale proceeds and disburses them. First, the trustee will pay off the mortgage lender. If the mortgage lender has been paid in full and there are funds left over, then the trustee will search for junior lienholders, seek to confirm whether they have valid liens, and pay them using the foreclosure sale proceeds. If there are no junior lienholders to pay, then the trustee will disburse the overage funds to the borrowers on the mortgage loan, i.e., the former owners of the subject real estate.

The mortgage lender will never be paid more than what the mortgage lender is owed at a foreclosure auction. The “equity” in the house does not belong to the mortgage lien holder. If the mortgage lender bids more than the credit bid, then the mortgage lender must pay in cash or certified funds and those funds, above and beyond the credit bid, will be disbursed to the junior lienholders and/or the former owners of the property (the borrowers on the mortgage loan).

If there is a dispute as to who the foreclosure proceeds are supposed to be disbursed to, then the trustee might file a lawsuit called an “interpleader.” In an interpleader, the trustee will deposit the disputed funds into the registry of the Court, serve citations upon all interested parties, and then let those parties argue their case to the Judge as to why they should receive the funds.

How Long Does a Foreclosure Take?

Foreclosures always occur on the first Tuesday of the month unless that date would fall on a specified holiday. “If the first Tuesday of a month occurs on January 1 or July 4, a public sale under Subsection (a) must be held between 10 a.m. and 4 p.m. on the first Wednesday of the month.” Tex. Prop. Code Ann. § 51.002(a-1). In order to foreclose a property on the first Tuesday of the month, the mortgage lender must have a notice of foreclosure sale (also known as a “Notice of Trustee’s Sale”) posted and served “at least 21 days before the date of sale.” Id. at (b). So, you look at a calendar for the first Tuesday of the month, and then you count back three Tuesdays from that Tuesday. The foregoing date is your posting deadline if you want your property to be in the next monthly foreclosure auction.

On residential property, the mortgage lender must “serve . . . written notice . . . giving the debtor at least 20 days to cure the default” before the Notice of Trustee’s Sale is posted. So, on any residential foreclosure, there is a bare minimum of a 20-day cure notice, plus a 21-day posting notice. This is at least 41 days of notice that is required. The mortgage lender, however, cannot merely follow the notice provisions listed in Section 51.002 of the Texas Property Code. Instead, the mortgage lender needs to read the loan origination documents and give any additional notice that is required in those documents. Then, the lender needs to evaluate whether any consumer-protection laws would impose further notice requirements. Please see our other, more in-depth, foreclosure article here ( for more information about federal consumer-protection laws like Dodd-Frank or RESPA. If 12 C.F.R. § 1024.41(f)(i) applies, then the Notice of Trustee’s Sale should be posted when the “borrower’s mortgage loan obligation is more than 120 days delinquent.”

A common rule of thumb for when a seller-finance mortgage lender or servicer should transfer the file to a foreclosure law firm is to refer the file once the borrower’s mortgage loan account has been delinquent for sixty (60) days. This is not a requirement, just a commonly-used modus operandi for seller-financed mortgage loans.

As a result of the foregoing, without consideration for which consumer-protection laws apply or do not apply and not accounting for what any particular loan documents may require, a rule of thumb for many seller-financed mortgages would be for the foreclosing law firm to give a 20 day notice to cure and notice of intent to accelerate followed by a notice of acceleration. Between and after these notices, an additional 20 to 30 or so days may accrue. As a result of the foregoing, with these notices and a 60-day delinquency referral, the loan should roughly be at about the 120-day delinquency mark when it is time to go from the notice of acceleration to the posting of the Notice of Trustee’s Sale.

So, the answer to the question “How long does a foreclosure take?” is that “it depends on the facts and circumstances,” but generally the foreclosure would likely occur about 150 days after the seller-financed residential mortgage loan first became delinquent in a typical situation. Obviously, a bankruptcy or a series of bankruptcies by the borrower would greatly delay this. When bankruptcies are taken into account, the foreclosure process could take several years. In some extreme cases, over a decade.

Should I Take a Deed-in-Lieu of Foreclosure?

When it comes to taking a deed in lieu of foreclosure in Texas, the most important law that the lender mortgagee needs to be aware of is Section 51.006 of the Texas Property Code. Before reviewing Tex. Prop. Code § 51.006, however, the lender should be aware of some basic lien priority concepts. “We recognize the well-established rule that following the valid foreclosure of a senior lien, junior liens, if not satisfied from the proceeds of sale, are extinguished.” AMC Mortg. Services, Inc. v. Watts, 260 S.W.3d 582, 585 (Tex. App.—Dallas 2008, no pet.). “In a contest over rights or interests in property, the party that is first in time is first in right.” Id. As a result of the foregoing, when a seller-financed mortgage lien forecloses, the foreclosure will “extinguish” junior lienholders such as mechanic’s liens, judgment liens, or any other liens (subject to some notable exceptions) that arise after the date that the property was seller-financed. Notable exceptions include property tax liens (typically held by school districts, hospitals, and cities) and, to an extent, federal tax liens. Please see our other, less basic, article on foreclosures for more information about foreclosure’s effect on federal tax liens:

Based on the foregoing, the answer to the question “Should I take a deed-in-lieu of foreclosure?” is that you should probably (a) run a title search, and (b) if the title search reveals junior liens that would be “extinguished” by a foreclosure yet would not be “extinguished” by a deed in lieu, then you should probably foreclose rather than take a deed-in-lieu so as to avoid paying junior liens that the mortgagor should be responsible for. Under Section 51.006 of the Texas Property Code, a lender who qualifies and follows the proper procedures may get a mulligan. If the rules in Tex. Prop. Code § 51.006 apply, then the lender can go ahead and foreclose so as to extinguish junior liens even after the deed-in-lieu has been taken. Please note that Section 51.006 does not give every mortgagee a mulligan on the deed-in-lieu in every situation. Instead, you need to read that law, evaluate whether it applies, and follow the procedures listed therein.

Copyright, Ian Ghrist, 2020, All Rights Reserved. Unauthorized reproduction strictly prohibited.

Disclaimer: This document is for informational purposes only. Do not rely on any part of this document as legal advice. Instead, seek out the advice of a licensed attorney with regard to the particular facts and circumstances of your legal matter. Also, this information may be out-of-date or wrong and is not intended to be comprehensive or to address any potential or specific factual or legal scenario.

Partnership and Joint Venture Disputes

Real estate investors often enter into joint ventures on a project-by-project basis. These tend to arise ad hoc and without significant planning. Sometimes the party with money finds a contractor and decides to enter into a profit-sharing arrangement instead of or on top of the normal payment for labor and materials. Other times, the wholesaler or a realtor decide to go into business with the investor instead of sticking to the traditional roles. Partnerships do not happen as often. Generally, when people decide to turn their job-by-job joint ventures into a longer-term and broader relationship, they have the foresight to formalize the arrangement through the formation of a Limited Liability Company or other entity with a formal operating agreement and/or bylaws.

“A partnership is generally defined as an association among two or more persons to carry on as co-owners a business for profit. See, e.g., Tex.Rev.Civ.Stat.Ann. art. 6132b, sec. 6 (Vernon 1970). A joint venture is similar, but is generally limited to a single transaction. C.C. Roddy, Inc. v. Carlisle, 391 S.W.2d 765 (Tex.Civ.App.—Fort Worth 1965, writ ref’d n.r.e.).” Harrington v. Harrington, 742 S.W.2d 722, 724 (Tex. App.—Houston [1st Dist.] 1987, no writ) (emphasis added). “Under Texas law, joint ventures are legal entities described as being ‘in the nature of a partnership engaged in the joint prosecution of a particular transaction for mutual profit.’ Brown v. Cole, 155 Tex. 624, 631, 291 S.W.2d 704, 709 (1956).” Lawler v. Dallas Statler-Hilton Joint Venture, 793 S.W.2d 27, 33 (Tex. App.—Dallas 1990, writ denied). “Generally, joint ventures are governed by the rules applicable to partnerships. Truly v. Austin, 744 S.W.2d 934, 937 (Tex.1988); Hackney v. Johnson, 601 S.W.2d 523, 526 (Tex.Civ.App.—El Paso 1980, writ ref’d n.r.e.).” Id.; Blackburn v. Columbia Med. Ctr. of Arlington Subsidiary, L.P., 58 S.W.3d 263, 273 (Tex. App.—Fort Worth 2001, pet. denied). “Texas, since the adoption of the Uniform Partnership Act, expressly follows the entity theory of partnership for most purposes. Haney v. Fenley, Bate, Deaton and Porter, 618 S.W.2d 541, 542 (Tex.1981).” Id.

In 1961, Texas adopted the Texas Uniform Partnership Act (TUPA). Ingram v. Deere, 288 S.W.3d 886, 894 (Tex. 2009). Whereas the common law required evidence of each factor to establish a partnership, TUPA imposes a totality-of-the-circumstances test and emphasizes that “profit sharing” is the most important factor. Id. at 896-98. Additionally, “A partner is not entitled to receive compensation for services performed for a partnership.” Tex. Bus. Orgs. Code § 152.203.

Often, in partnership or joint venture disputes, one of the parties will bring a breach of fiduciary duty claim. A formal fiduciary relationship, which arises as a matter of law, exists between partners and joint venturers. Moore v. Bearkat Energy Partners, LLC, 10-17-00001-CV, 2018 WL 683754, at *8 (Tex. App.—Waco Jan. 31, 2018, no pet.) (explaining the difference between formal and informal fiduciary relationships). “[U]nder Texas law, ‘the issue of control has always been the critical fact looked to by the courts’ in determining whether to impose fiduciary responsibilities on individuals . . .’” Allen v. Devon Energy Holdings, L.L.C., 367 S.W.3d 355, 391 (Tex. App.—Houston [1st Dist.] 2012) (pet. granted, judgm’t vacated by agr., Ct. App. opinion not withdrawn). In a formal fiduciary relationship, the fiduciary duty arises as a matter of law, whereas the existence of an informal fiduciary duty typically requires a factfinding. Meyer v. Cathey, 167 S.W.3d 327, 330 (Tex. 2005) (“In certain formal relationships . . . a fiduciary duty arises as a matter of law.”).

In real estate disputes involving development projects, ownership of the assets may be one of the most crucial issues. The law regarding when a joint venture owns property can be vague at times. Under Tex. Bus. Orgs. Code § 152.102(b), property is partnership property when the acquisition instrument so indicates or where property is acquired with partnership property. But, Section 152.002 of the Tex. Bus. Orgs. Code does not specify Section 152.102 as being one of the provisions that the partnership agreement cannot vary. As a result, a partner may allege an express or implied agreement as to property ownership different from how title to the property was taken. “[U]nder well-established partnership principles, ownership of property intended to be a partnership asset is not determined by legal title, but rather by the intention of the parties as supported by the evidence.” Foust v. Old Am. County Mut. Fire Ins. Co., 977 S.W.2d 783, 786 (Tex. App.—Fort Worth 1998, no pet.).

Membership in a Limited Liability Company is a matter of fact for the jury to decide, not for the trial court to rule on. Rocklon LLC v Paris, 2016 Tex. App. LEXIS 11393 (Beaumont 2016). “For a person who becomes a member of an LLC after it is formed, his or her membership is effective ‘on approval or consent of all of the company’s members.’ Tex. Bus. Orgs. Code Ann. § 101.103.” Dixon v. Freese, 3:13CV236-LG-JMR, 2014 WL 11444119, at *4 (S.D. Miss. Apr. 14, 2014), aff’d, 615 Fed. Appx. 245 (5th Cir. 2015). Admission to the company may occur as of the first date that the admission is reflected in the company’s records. Tex. Bus. Orgs. Code Ann. § 101.103 (West).

Copyright, Ian Ghrist, 2019, All Rights Reserved. Unauthorized reproduction strictly prohibited.

Disclaimer: This document is for informational purposes only. Do not rely on any part of this document as legal advice. Instead, seek out the advice of a licensed attorney with regard to the particular facts and circumstances of your legal matter. Also, this information may be out-of-date or wrong and is not intended to be comprehensive or to address any potential or specific factual or legal scenario.

A Basic Primer on Usury Law in Texas

Usury Definitions

“‘Usurious interest’ means interest that exceeds the applicable maximum amount allowed by law.” Tex. Fin. Code Ann. § 301.002(a)(17). “‘Interest’ means compensation for the use, forbearance, or detention of money. The term does not include time price differential, regardless of how it is denominated. The term does not include compensation or other amounts that are determined or stated by this code or other applicable law not to constitute interest or that are permitted to be contracted for, charged, or received in addition to interest in connection with an extension of credit.” Id. at (a)(4). “‘Time price differential’ means an amount, however denominated or expressed, that is: (A) added to the price at which a seller offers to sell services or property to a purchaser for cash payable at the time of sale; and (B) paid or payable to the seller by the purchaser for the privilege of paying the offered sales price after the time of sale.” Id. at (a)(16). A contract is usurious when there is any contingency by which the lender may get more than the lawful rate of interest. Butler v. Holt Mach. Co., 741 S.W.2d 169, 176 (Tex. App.—San Antonio 1987), opinion corrected on denial of reh’g, 739 S.W.2d 958 (Tex. App.—San Antonio 1987, no writ).

Usury Rates

The usury rate in Texas is ten (10) percent a year except as otherwise provided by law. Tex. Fin. Code Ann. § 302.001. The ten percent default usury rate means virtually nothing given that rate ceilings of Subchapter A of Chapter 303 of the Texas Finance Code create an exception to the usury rate rule that, more or less, swallows the rule whole. “Except as provided by Subchapter B [mostly related to credit cards], a person may contract for, charge, or receive a rate or amount that does not exceed the applicable interest rate ceiling provided by this chapter.” Tex. Fin. Code Ann. § 303.001. “The parties to a written agreement may agree to an interest rate . . . that does not exceed the applicable weekly ceiling.” Tex. Fin. Code Ann. § 303.002. So, basically, most loans can charge the weekly ceiling, which is generally going to be substantially higher than the ten (10) percent default usury rate, rendering the default rate rarely applicable.

Where Do I Look to See What Rates I Can Charge?

The weekly rate can be found in the Texas Credit Letter, which is published weekly by the Texas Office of Consumer Credit Commissioner located at 2601 N. Lamar Blvd., Austin, Texas 78705-4207. In the April 16, 2019 Texas Credit Letter, the weekly rate ceiling was 18.00%. The Texas Credit Letter can be found online:

Spreading Doctrine

“To determine whether a loan secured in any part by an interest in real property, including a lien, mortgage, or security interest, is usurious, the interest rate is computed by amortizing or spreading, using the actuarial method during the stated term of the loan, all interest at any time contracted for, charged, or received in connection with the loan.” Tex. Fin. Code Ann. § 302.101.

What constitutes “interest”?

“The court of civil appeals has improperly stressed the labels placed upon the charges by the savings and loan association as being controlling of their real nature. It has often been said that courts will look beyond the form of the transaction to its substance in determining the existence or nonexistence of usury.” Gonzales County Sav. & Loan Ass’n v. Freeman, 534 S.W.2d 903, 906 (Tex. 1976). “Such a rule is to be fairly applied to both borrowers and lenders alike. Labels put on particular charges are not controlling. A charge which is in fact compensation for the use, forbearance or detention of money is, by definition, interest regardless of the label placed upon it by the lender. Art. 5069—1.01(a). On the other hand, a fee which commits the lender to make a loan at some future date does not fall within this definition. Instead, such a fee merely purchases an option which permits the borrower to enter into the loan in the future. See, e.g., Financial Federal Savings & Loan Association v. Burleigh House, Inc., 305 So.2d 59 (Fla.Dist.Ct.App.1974); D & M Development Co. v. Sherwood & Roberts, Inc., 93 Idaho 200, 457 P.2d 439 (1969); Prather, Mortgage Loans and the Usury Laws, 16 Bus.Law. 181, 188 (1960). It entitles the borrower to a distinctly separate and additional consideration apart from the lending of money. Therefore, the lender may charge extra for this consideration without violating the usury laws. Greever v. Persky, 140 Tex. 64, 165 S.W.2d 709 (1942).” Gonzales County, 534 S.W.2d at 906. “Whether a charge is really interest or not is generally a question for the jury. “Where there is a dispute in the evidence as to whether the charge is merely a device to conceal usury, a question of fact is raised for the jury.” Id. “[I]t has been held that a lender may not charge 11 percent for the first five years and nine percent for the second five years and claim that the total loan is at the legal rate of 10 percent.” Riverdrive Mall, Inc. v. Larwin Mortg. Inv’rs, 515 S.W.2d 5, 9 (Tex. Civ. App.—San Antonio 1974, writ ref’d n.r.e.) (emphasis added).

When Does a Usury Savings Clause Protect the Lender?

Texas law generally allows lenders to avoid liability through usury savings clauses, but only within reason. You cannot just contract for thirty percent interest and then skirt the usury violation with a savings clause. There has to be some kind of avenue for charging non-usurious interest on the contract or interpreting the contract in such a way as to avoid usury.

“A savings clause is ineffective, however, only if it is directly contrary to the explicit terms of the contract . . . . As a simple example, a creditor may not specifically contract for a 30% interest rate and then avoid the imposition of usury penalties by relying on a savings clause that declares an intention not to collect usurious interest . . . .” First State Bank v. Dorst, 843 S.W.2d 790, 793 (Tex. App.—Austin 1992, writ denied). A savings clause can “supplement and explain” the “intent of the parties.” Id. The Texas Supreme Court has indicated that a usury savings clause may cure certain contingency provisions that may or may not result in a charge of usurious interest. Nevels v. Harris, 129 Tex. 190, 198, 102 S.W.2d 1046, 1050 (1937); Smart v. Tower Land & Inv. Co., 597 S.W.2d 333, 341 (Tex. 1980).

In a complicated usury dispute, ties go to the lender. “The usury statutes are penal in nature and, accordingly, must be strictly construed in such a way as to give the lender the benefit of the doubt.” Counsel Fin. Services, L.L.C. v. Leibowitz, 13-12-00103-CV, 2013 WL 3895331, at *4 (Tex. App.—Corpus Christi July 25, 2013, pet. denied).

Copyright, Ian Ghrist, 2019, All Rights Reserved. Unauthorized reproduction strictly prohibited.

Disclaimer: This document is for informational purposes only. Do not rely on any part of this document as legal advice. Instead, seek out the advice of a licensed attorney with regard to the particular facts and circumstances of your legal matter. Also, this information may be out-of-date or wrong and is not intended to be comprehensive or to address any potential or specific factual or legal scenario.

Probating a Will as a Muniment of Title in Texas

Texas is unique in allowing last wills and testaments to be probated as a “muniment of title.” Many states have no such equivalent. “The case law in Texas is quite liberal in permitting a will to be offered as a muniment of title after the statute of limitations has expired upon the showing of an excuse by the proponent for the failure to offer the will earlier.” In re Estate of Allen, 407 S.W.3d 335, 339 (Tex. App.—Eastland 2013, no pet.). Section 256.003(a) of the Texas Estates Code provides that “a will may not be admitted to probate after the fourth anniversary of the testator’s death unless it is shown by proof that the applicant for the probate of the will was not in default in failing to present the will for probate on or before the fourth anniversary of the testator’s death.” Section 256.003(b) of the Texas Estates Code provides that “letters testamentary may not be issued if a will is admitted to probate after the fourth anniversary of the testator’s death unless it is shown that the application for probate was filed on or before the fourth anniversary of the testator’s death.” Accordingly, a will can be admitted to probate after four years if the proponent was not in default in failing to present the will to the probate court, but letters testamentary cannot be obtained after four years. So, after four years, it generally makes sense to probate the will solely as a muniment of title since letters testamentary are not available. Chapter 257 of the Texas Estates Code covers Probate of a Will as a Muniment of Title. Under Texas law, anyone who “is entitled to property under the provisions of a will admitted to probate as a muniment of title” can “deal with and treat the property in the same manner as if the record of title to the property was vested in the person’s name.” Tex. Estates Code Ann. § 257.102(b) (West). Moreover, when a will is probated as a muniment of title, third parties who transfer custody of property to “a person described in the will as entitled to receive the asset” are shielded from any liability for doing so. Tex. Estates Code Ann. § 257.102(a) (West). When probating a will as a muniment of title, the notice requirements to beneficiaries and claimants under Chapter 308, Subchapter A of the Texas Estates Code do not apply. Tex. Estates Code Ann. § 308.0015. Citation in a muniment of title case typically occurs by posting. See Tex. Estates Code §§ 258.001, 303.001. Probate courts have discretion over whether to require additional notice. Tex. Estates Code § 51.001.

Copyright, Ian Ghrist, 2019, All Rights Reserved. Unauthorized reproduction strictly prohibited.

Disclaimer: This document is for informational purposes only. Do not rely on any part of this document as legal advice. Instead, seek out the advice of a licensed attorney with regard to the particular facts and circumstances of your legal matter. Also, this information may be out-of-date or wrong and is not intended to be comprehensive or to address any potential or specific factual or legal scenario.

Contracts for Deed and Lease Option Agreements on Residential Property in Texas

In traditional owner-finance, the seller deeds the property to the buyer and retains a vendor’s lien in the property to secure the repayment of the loan to the buyer. The buyer becomes the legal, deeded owner of the property. If the buyer fails to pay the loan, then the seller may foreclose on the loan. A contract for deed is a different form of seller-finance. In a contract for deed, the seller keeps the title to the property and the buyer does not receive a deed to the property. Instead, the seller signs a long-term purchase contract. The long-term purchase contract requires the buyer to make monthly or other periodic payments over a long period of time. The contract provides that the seller will deed the property to the buyer after the buyer completes all payments.

History of Contract-for-Deed Law in Texas. In Texas, contracts for deed on residential property are considered potentially predatory and subject to strict consumer-protection laws. Specifically, the Texas Legislature found that “contracts for deed have long been disfavored because they encumber title without transferring title, cannot be sold in the real estate market, cannot be used to borrower money to make improvements, and are potentially abusive transactions under which legal title to homestead property may be withheld until many years after the buyer has built a home and made other expensive improvements.” Bill Analysis, Senate Research Center, HB 311, By: Canales (Lucio), Business and Commerce, 5/8/2015, Engrossed.

In a contract for deed, buyers could purchase a house, complete most or all of the payments under the contract, and then get evicted by the seller, with the seller claiming some technical default causing forfeiture of all of the buyer’s rights. Many buyers lacked the money to litigate disputes over technicalities in the contract. Moreover, even if the buyer did default, the Texas legislature found the results draconian because the buyer often lost years, maybe decades, worth of built-up equity in the property. In a foreclosure sale, the buyer would receive some protection for the buyer’s equity position in the property built up over time. In a contract for deed, however, the buyer received no protection for the buyer’s equity position because, technically, the buyer never had an equity position, merely an executory contract right.

The Texas legislature, in 1995, began regulating contracts for deed, but only in counties along the Mexico border. In 2001, the Texas Legislature expanded that contract-for-deed protection statewide. As of January 1st, 2006, the Texas legislature updated Subchapter D to provide that residential leases combined with an option to purchase the property are treated like contracts for deed and subject to all of the many Subchapter D rules.

In 2015, the Legislature enacted House Bill 311, 84th Regular Session (hereinafter “HB 311”). HB 311 made the following changes, among other changes:

  1. Sellers can only enforce the remedy of rescission or forfeiture and acceleration when the contract has not been recorded in the real property records. Tex. Prop. Code § 5.064(4).
  2. Sellers must record the contract within thirty days of the date that the contract is executed. Tex. Prop. Code § 5.076(a).
  3. If a seller fails to record the contract, then the seller can be liable for up to $500.00 for each calendar year of noncompliance. Tex. Prop. Code § 5.076(e).
  4. Under the 40/48 rule, the seller “is granted the power to sell, through a trustee designated by the seller, the purchaser’s interest in the property,” and the seller’s ability to enforce the remedies of rescission or of forfeiture and acceleration are limited. HB 311 modified this rule to provide that, after the contract is recorded, the seller can no longer enforce the remedy of rescission or of forfeiture and acceleration, regardless of whether the buyer has met the 40/48 rule.
  5. Amends Tex. Prop. Code § 5.079 to provide that “A recorded executory contract shall be the same as a deed with a vendor’s lien.”

Download the 2015 bill, HB 311 of the 84th Regular Legislative Session, and legislative commentary on the bill here.

Contracts for deed and leases combined with an option to purchase residential property are strictly regulated in Texas by Subchapter D of Chapter 5 of the Texas Property Code (hereinafter “Subchapter D”). For the most part, the only thing that real estate investors in Texas need to know about contracts for deed and lease options on residential property is “don’t do them.” In theory, someone could originate real estate transactions in compliance with Subchapter D. In practice, no one tends to comply and even if someone did comply, the transaction still would not make sense. A contract for deed or residential lease option never makes sense for the seller/landlord in Texas because even if the seller/landlord complies with every regulation, a tenant’s/buyer’s dispute, whether in good faith or not, regarding compliance potentially deprives the justice of the peace court of jurisdiction over an eviction case and prevents nonjudicial foreclosure. Accordingly, the seller/landlord, in reality, can rarely evict a tenant/buyer who refuses to leave without filing a lawsuit in a District Court for the county that the property is located in. The lawsuit will likely take over a year before the suit is called to trial. The lawsuit will entail substantial legal fees and a significant investment of time and effort on paperwork and trial preparations. No real estate investor should even risk getting stuck in that situation. Hence, the foregoing advice to simply avoid these transactions. Instead, do a normal lease without an option, or do traditional owner-finance with a promissory note and deed of trust. Either of these options allows the seller to evict or foreclose then evict without the necessity of a District Court lawsuit. Eviction suits, in Texas, go through small claims court where a timely and binding decision by the Court can generally be obtained. District Courts, on the other hand, do not give timely decisions. Completing a District Court lawsuit, where one party wants to delay the case, in less than a year is nearly impossible. In theory, if both parties and the Court agreed to a quick trial setting, then a District Court case could potentially go to trial within one year, but, in reality, one party or the Court always wants to delay.

Does Subchapter D Apply to My Transaction?

Subchapter D “applies only to a transaction involving an executory contract for conveyance of real property used or to be used as the purchaser’s residence . . . .” Tex. Prop. Code § 5.062(a). Additionally, “an option to purchase real property that includes or is combined or executed concurrently with a residential lease agreement, together with the lease, is considered an executory contract for conveyance of real property.” Id. at (a)(2). However, Subchapter D does not apply to “an executory contract that provides for the delivery of a deed from the seller to the purchaser within 180 days of the date of the final execution of the executory contract.” Id. at (c). If a contract for deed is done between family members, then most of the particularly onerous requirements of Subchapter D do not apply. See Tex. Prop. Code § 5.062(d). The important takeaways here are that (1) Subchapter D does not apply to contracts for less than a six month term, and (2) Subchapter D only applies if the buyer/tenant intends to use the property as their residence or their family member’s residence.

Limits on Subchapter D Applicability to Lease-Option Agreements. Buyers under a lease-option agreement cannot convert the property to traditional owner-finance under Tex. Prop. Code § 5.081. See Tex. Prop. Code § 5.062(e). Also, the 40/48 rule (§ 5.066) does not apply to lease-options. Id. Additionally, if a lease-option has a term of less than three years and the parties have not had a contract to purchase the property for longer than three years, then only the notice and default provisions (§ 5.063-5.065), the terms and waivers provisions (§ 5.073), the right to cancel for improper platting (§ 5.083), and the requirement that the seller owns the property free and clear of liens or other encumbrances (§ 5.085) apply. Tex. Prop. Code § 5.062(f).

What Does Subchapter D Require of the Seller/Landlord?

So, you want to originate a Subchapter D-compliant contract for deed? First of all, stop right here. Re-evaluate your situation. Is there any possible way that you can handle the transaction differently? If so, then do it differently. But, for those that find themselves in a situation where they need to enter into a contract for deed and intend to comply with the Texas Property Code, then here is a non-exhaustive list of the various things that you need to do to comply with Texas law:

  • 1. If the contract for deed negotiations are primarily not in English, then the seller “shall provide a copy” in the primary language used for negotiations “of all written documents relating to the transaction, including the contract, disclosure notices, annual accounting statements, and a notice of default required by this subchapter.” Tex. Prop. Code § 5.068.
  • 2. The seller can only “enforce the remedy of rescission or of forfeiture and acceleration” (Tex. Prop. Code § 5.064) if a notice of default and explanation of how to cure default is given that complies with all of the many, many rules in Sections 5.063 and 5.065 of the Texas Property Code.
  • 3. The 40/48 Rule. “If a purchaser defaults after the purchaser has paid 40 percent or more of the amount due or the equivalent of 48 monthly payments under the executory contract or, regardless of the amount the purchaser has paid, the executory contract has been recorded, the seller is granted the power to sell, through a trustee designated by the seller, the purchaser’s interest in the property as provided by this section. The seller may not enforce the remedy of rescission or of forfeiture and acceleration after the contract has been recorded.” Tex. Prop. Code § 5.066. So, most of the time, a contract for deed can only be unwound with a foreclosure auction, despite the buyer having no legal title to the property. There is a lot to unpack there, including:
  •           (a) A sixty-day notice to cure default is required and the notice of trustee’s sale under Section 51.002 of the Property Code is not valid unless it is given after the 60-day notice to cure expired. Tex. Prop. Code § 5.066(c).
  •           (b) At the foreclosure sale, the trustee must (1) “convey . . . fee simple title,” and (2) “warrant that the property is free from any encumbrance.” Tex. Prop. Code § 5.066(d). STOP AND THINK FOR A MINUTE ABOUT THIS. In a typical wrapped lien foreclosure sale, the foreclosure on the seller-financed second lien leaves the seller’s un  derlying wrapped first lien unaffected. THIS IS NOT THE CASE IN CONTRACTS FOR DEED. Instead the underlying lien must be paid off. Otherwise, no fee simple title free of encumbrance can be conveyed. The seller probably wants to open the bidding with a credit bid sufficiently high to pay the first, wrapped lien off, but can the seller do that? Also, how does the seller find a trustee that is willing to “warrant that the property is free from any encumbrance?” Can the trustee be liable on that warranty? There are no good answers to these questions because the statutes and caselaw do not adequately address these issues.
  • 4. The seller must provide the buyer with a recent survey, a legible copy of any document that describes an encumbrance or other claim (including restrictive covenants), and a written notice in the format prescribed by Section 5.069(a)(3) of the Texas Property Code. Tex. Prop. Code § 5.069(a). Moreover, the seller may have to provide a utilities availability notice if the property is not located in a recorded subdivision, advertisements must disclose information about availability of utilities, and the seller’s failure to provide the foregoing information is a violation of the Texas Deceptive Trade Practices Act (DTPA) and “entitles the purchaser to cancel and rescind the executory contract and receive a full refund of all payments made to the seller.” Tex. Prop. Code § 5.069(b)-(d).
  • 5. Before doing a contract for deed, the seller must provide the purchaser with a tax certificate and a legible copy of any insurance policy, binder, or other evidence related to insurance. The seller’s failure to comply is a violation of the Texas Deceptive Trade Practices Act and “entitles the purchaser to cancel and rescind the executory contract and receive a full refund of all payments made to the seller.” Tex. Prop. Code § 5.070.
  • 6. Before doing a contract for deed, the seller must provide the buyer with a written statement containing the purchase prices, interest rate, dollar amount of interest charged for the term of the contract, total amount of principal and interest to be paid, late charges, and a statement that “the seller may not charge a prepayment penalty or any similar fee if the purchaser elects to pay the entire amount due under the contract before the scheduled payment date under the contract.” Tex. Prop. Code § 5.071.
  • 7. Contracts for deed must be in writing and cannot be varied by oral agreements. Moreover, the seller must give the borrower a written notice in 14-point boldfaced type or 14-point uppercase typewritten letters, in the exact statutory form, advising the borrower regarding the prohibition against oral agreements. The seller’s failure to provide this statutory notice violates the DTPA and “entitles the purchaser to cancel and rescind the executory contract and receive a full refund of all payments made to the seller.” Tex. Prop. Code § 5.072.
  • 8. Late payment fees are strictly regulated, the buyer cannot be prohibited from pledging the buyer’s interest as security for a loan for improvements, no prepayment penalty or similar fee can be charged, no option fee can be forfeited due to late payments, and the borrower cannot be penalized in any way for requesting repairs or exercising rights under Chapter 92 of the Texas Property Code. Tex. Prop. Code § 5.073. Finally, any waivers or exemptions of the foregoing provisions are void. Id.
  • 9. The buyer can cancel for any reason within fourteen (14) days of the date of the contract. The seller must give the buyer a statutory notice to this effect. Tex. Prop. Code § 5.074.
  • 10. The seller must record the executory contract within thirty (30) days. The seller also must record the instrument terminating the contract. The seller that violates this section is liable for up to $500.00 for each year of noncompliance. Tex. Prop. Code § 5.076.
  • 11. The seller must provide the buyer an annual accounting statement in the statutory format even after the contract for deed is converted to actual title. The seller that fails to send the proper annual accounting is liable for either (1) $100 per year plus attorney’s fees, or (2) $250 per day not to exceed the fair market value of the property plus attorney’s fees, depending on whether the seller has conducted “less than two transactions in a 12-month period under this section” or whether the seller has conducted “two or more transactions in a 12-month period under this section.” Tex. Prop. Code § 5.077.
  • 12. The insured must notify the insurer of the executory contract and the insurer must disburse proceeds jointly to the purchaser and the seller designated in the contract. Both the purchaser and seller must ensure that insurance proceeds are used to “repair, remedy, or improve the condition on the property.” Tex. Prop. Code § 5.078. The failure to comply is a DTPA violation. Id.
  • 13. Interestingly, “A recorded executory contract shall be the same as a deed with a vendor’s lien.” Tex. Prop. Code § 5.079. What exactly the Texas Legislature meant by that sentence is anyone’s guess. The buyer on a recorded executory contract gets the warranties that would come with a general warranty deed unless otherwise limited by the contract. Id. The seller that fails to transfer recorded, legal title after receipt of final payment can be subject to large liquidated damages statutory penalties. Id.
  • 14. Under Section 5.081 of the Texas Property Code, the buyer “at any time and without paying penalties or charges of any kind” is entitled to convert the contract-for-deed into recorded, legal title by tendering a promissory note for the balance owed with the same terms as the contract. The seller that fails to tender a deed and give the required written explanations can face draconian penalties in the form of $500.00 per day in liquidated statutory damages. The savvy buyer will tender a promissory note pursuant to the Texas Property Code to the seller and then try to stick the seller with penalties that are in no way proportionate to the seller’s wrongdoing. Most sellers that do contracts for deed are unsophisticated and have no ability to comprehend why or how they could get stuck with such liability or why Texas law would impose such heavy-handed measures on them.
  • 15. The buyer on a contract for deed can demand to know the amount owed under the contract and the name and address of the seller’s desired foreclosure trustee. Tex. Prop. Code § 5.082. If the seller fails to provide the information, then the buyer can determine the amount and notify the seller of the amount determined. Id. The seller then has to contest the amount determined based on “written records kept by the seller or the seller’s agent that were maintained and regularly updated for the entire term of the executory contract.” Id.
  • 16. The buyer on a contract for deed can rescind the agreement at any time if the seller has not properly subdivided or platted the property and fails to timely cure the issue. Tex. Prop. Code § 5.083. The buyer seeking to rescind should follow the statutory procedures. If the rescission occurs, then the seller may have to “return to the purchaser all payments of any kind made to the seller under the contract and reimburse the purchaser for (a) any payments the purchaser made to a taxing authority for the property; and (b) the value of any improvements made to the property by the purchaser.” Id. at (b)(2).
  • 17. The buyer on a contract for deed can deduct any amounts owed to the buyer by the seller under Subchapter D of Chapter 5 of the Texas Property Code from amounts owed to the seller without taking any judicial action. Tex. Prop. Code § 5.084.
  • 18. One of the most problematic issues with Subchapter D regulations is Section 5.085 of the Texas Property Code (the “Fee Simple Title Required Rule”). This section prohibits a seller from entering into a contract “if the seller does not own the property in fee simple free from any liens or other encumbrances.” This may be the single most violated Subchapter D rule. Many sellers doing contracts for deeds have a mortgage on the property and use a contract for deed to resell the property without paying the mortgage off. The seller obviously should take the buyer’s monthly payments and apply the payments towards the seller’s mortgage. But, unscrupulous sellers sometimes take the buyer’s money, fail to pay the mortgage, and then file for bankruptcy protection when the mortgage is getting foreclosed. This results in a disaster to the buyer who will incur a lot of legal fees and may or may not be able to save the property. Those sellers deserve whatever liquidated damages penalties Subchapter D imposes on them.
  •           (a) There are a few exceptions to the Fee Simple Title Required Rule, with the most important one probably being the one applicable to purchase-money loans that the seller used to acquire the property prior to execution of the contract for deed. Sellers with a prior purchase-money loan must comply with an extensive list of requirements, including but not limited to (1) providing written disclosure of the wrapped lien information in the statutorily-required format, (2) the lien does not encumber other properties, (3) the lien secures indebtedness that will never be greater than the balance owed by the contract for deed buyer, (4) the contract for deed contains various statutorily-required covenants, (5) the lienholder does not prohibit the property from being encumbered by an executory contract, and (6) the lienholder consents to work with the contract for deed buyer. Tex. Prop. Code § 5.085. Virtually every underlying lienholder will have a due-on-sale clause. It could probably be argued that nearly any contract for deed violates nearly any due on sale clause, so, this exception is likely not particularly helpful for most sellers, at least until there is some caselaw on file interpreting contracts for deed as generally not violating due on sale clauses.
  •           (b) The penalties for violating the Fee Simple Title Required Rule are stiff. A violation of Section 5.085 of the Texas Property Code is a DTPA violation. In addition to DTPA damages, the buyer can rescind the executory contract and receive from the seller a refund of all payments of any kind made to the seller under the contract, reimbursement for taxes paid, and reimbursement for improvements made to the property. Tex. Prop. Code § 5.085(c).
  •           (c) The seller who has a lien placed on the property by a person other than the seller has thirty days to take all steps necessary to remove the lien. Tex. Prop. Code § 5.085(d).

Equitable Limitations on Statutory Damages Under Subchapter D. Even though Subchapter D often allows the buyer to rescind the contract “and receive a full refund of all payments made to the seller,” the Texas Supreme Court has imposed equitable limitations on the literal language of the statute. Morton v. Nguyen, 412 S.W.3d 506, 511 (Tex. 2013). The Supreme Court, citing the Restatement (Third) of Restitution and Unjust Enrichment, said

“‘[R]escission is not a one-way street.’ Id. at 825. Rather, as we explained in Cruz, ‘[recission] requires a mutual restoration and accounting, in which each party restores property received from the other.’ Id. at 825–26 (citing Restatement (Third) of Restitution and Unjust Enrichment § 37 cmt. d (2011)). A seller’s wrongdoing does not excuse the buyers from counter-restitution under the circumstances of this case. See id. at 826. But here, as in Cruz, we similarly hold that notice and restitution or a tender of restitution are not prerequisites to the cancellation-and-rescission remedy under Subchapter D, as long as the affirmative relief to the buyer can be reduced by (or made subject to) the buyer’s reciprocal obligation of restitution. See id. at 827 (citing Restatement (Third) of Restitution and Unjust Enrichment § 54(5) (2011)).” Id.

Specifically, the Texas Supreme Court said that when the buyer rescinds, the buyer must “restore to the seller the value of the buyer’s occupation of the property” and that the trial court should consider “the rental value of the property during” the buyer’s occupation of the property. Id. So, rescission under contract for deed law may not be as terrifying for sellers as it seems at first glance. But, do not forget that these equitable setoffs apply only to rescission claims and may have no applicability to statutory liquidated damages or DTPA claims. Also, keep in mind that the buyer will probably continue to occupy the property for the duration of the lawsuit regarding any dispute.

The Seller Involved in a Contract for Deed Dispute With a Buyer Generally Has No Good Options Because Both Foreclosure and Eviction May be Unavailable or Highly Problematic. In any contract for deed dispute, the buyer will probably occupy the property for the entire duration of the lawsuit. Regardless of how fair that is or how much financial pressure the holding costs put on the seller, the seller’s options in dealing with the buyer are limited. To foreclose on the buyer, the seller usually has to conduct a foreclosure sale where the foreclosure trustee must (1) “convey . . . fee simple title,” and (2) “warrant that the property is free from any encumbrance.” Tex. Prop. Code § 5.066(d). If the seller has a loan on the property, then this becomes problematic. Also, figuring out how to properly paper the foreclosure process on a contract for deed is a nearly Sisyphean task for any attorney. The seller on a contract for deed faces similar problems with evictions. If the contract for deed does not expressly provide “for a landlord-tenant relationship if the buyer breach[es] the contract,” then no justice of the peace court or county court at law on appeal from the justice of the peace court has jurisdiction over an eviction suit. Aguilar v. Weber, 72 S.W.3d 729, 734 (Tex. App.—Waco 2002, no pet.). Accordingly, there is usually no easy or timely way to get a defaulting contract for deed buyer evicted.

In Texas, disputes regarding contracts to purchase real property are considered title disputes because the buyer under an executory contract to purchase real property is considered to hold “equitable title.” Johnson v. Wood, 138 Tex. 106, 110, 157 S.W.2d 146, 148 (Comm’n App. 1941) (by performing under a contract for purchase of real property, the buyer’s equitable right to specific performance “ripened into an equitable title” that, “as distinguished from a mere equitable right, will support an action for trespass to try title”); Leal v. ASAS, Ltd., 13-10-00629-CV, 2011 WL 3366363, at *3 (Tex. App.—Corpus Christi Aug. 4, 2011, no pet.) (justice court deprived of jurisdiction over eviction where “determining the right of possession necessarily involved a title inquiry into the contract to purchase land”); Cadle Co. v. Harvey, 46 S.W.3d 282, 287–88 (Tex. App.—Fort Worth 2001, pet. denied) (buyer under an executory contract for sale of real property acquired equitable title to the property when he took possession even though he had not yet paid the full purchase price). So, in theory, a contract for deed could be drafted with a landlord/tenant relationship clearly spelled out that would allow for the tenant to be evicted through an action for forcible detainer in the justice of the peace court, but in reality, a justice court or county court at law on appeal from justice court will rarely issue a writ of possession in a contract for deed dispute. Even if there is a landlord-tenant or tenancy-at-sufferance clause, you also have the 40/48 rule to deal with, along with the rules regarding recording of the contract and recording the contract making the contract equivalent to a promissory note and deed of trust. Reconciling those laws, some of which came out in 2015 after the Aguilar and Leal cases, with the ability to evict a contract for deed buyer in justice court is difficult.

Can I just have the buyer waive Subchapter D of Chapter 5 of the Texas Property Code? No, you cannot. See Tex. Prop. Code § 5.073(b). Also, many Subchapter D rules create DTPA violations and DTPA violations cannot be waived unless the waiver is in writing and signed by the consumer, the consumer is not in a significantly disparate bargaining position, and the consumer is represented by legal counsel that is not “directly or indirectly identified, suggested, or selected by a defendant or an agent of the defendant.” Tex. Bus. & Com. Code Ann. § 17.42 (West). Moreover, DTPA waivers must be bold and use the statutorily-required language. Id. at (c).

Are There Any Ways to Structure a Transaction That Does Not Trigger Subchapter D Without Doing a Deed, Promissory Note, and Deed of Trust, i.e., Traditional Seller-Finance? Maybe, but none of them are proven to work in court. If you use any of these methods, then you use them at your own peril. Here are the methods that could be tried:

  1. Use of a Land Trust. You could transfer the subject real property into a trust. The buyer could contract to purchase the beneficial interest in the trust rather than the property itself. Upon completion of payments, the buyer would be entitled to receive the beneficial interest in the trust. The seller/beneficiary under the trust would be selling the rights as beneficiary of the trust (e. the beneficial interest in the trust) as opposed to the real property itself. In this scenario, the beneficial interest in the trust is personal property, not real property. Because Subchapter D applies only to “an executory contract for conveyance of real property,” not personal property, Subchapter D would arguably not apply to this transaction. Tex. Prop. Code § 5.062(a) (emphasis added). You could also combine the land trust with an option agreement. Use of this method is not recommended. There is no guarantee that a court would actually accept this theory. This method is overly technical and, in general, consumer-protection laws, like Subchapter D, are not amenable to clever workarounds.
  1. Successive Six-Month Options. Subchapter D applies only to “an executory contract that provides for the delivery of a deed from the seller to the purchaser within 180 days of the date of the final execution of the executory contract.” Tex. Prop. Code Ann. § 5.062. Accordingly, Subchapter D would not apply to an option agreement that provided for the delivery of a deed from the seller to the purchaser within 180 days. Option agreements can, thus, be entered into without triggering Subchapter D for about six months or less. One could, in theory, include a provision in the contract allowing for the option to be renewed every six months as long as the buyer was not in default and provided that various other conditions are met. In theory, if option renewal was not guaranteed, then this would not trigger Subchapter D because the only option would be the initial six-month option. Each successive option would be a novation (e., a new contract). The buyer, however, would be at the seller’s mercy on whether the seller would enter into each six-month renewal. This arrangement may or may not trigger Subchapter D. Use of this method is not recommended. There is no guarantee that a court would actually accept this theory. This method is overly technical and, in general, consumer-protection laws, like Subchapter D, are not amenable to clever workarounds.

Copyright, Ian Ghrist, 2018, All Rights Reserved. Unauthorized reproduction strictly prohibited.

Disclaimer: This document is for informational purposes only. Do not rely on any part of this document as legal advice. Instead, seek out the advice of a licensed attorney with regard to the particular facts and circumstances of your legal matter. Also, this information may be out-of-date or wrong and is not intended to be comprehensive or to address any potential or specific factual or legal scenario.

Special Types of Liens in Texas and How to Foreclose on Them

In Texas, most foreclosures are conducted by the trustee under a deed of trust without the involvement of a court. However, many types of loans require the use of special procedures involving the Texas court system. This article seeks to summarize these various types of loans and provide citations to the relevant laws governing the methods employed in foreclosing on such special loan types.

Terminology for the Major Three Types of Foreclosure Sales. In Texas, “nonjudicial sale” means a foreclosure auction that occurs without any court involvement. The term “quasi-judicial” generally means a foreclosure auction that occurs with limited court involvement by use of the court procedures in Rules 735 and 736 of the Texas Rules of Civil Procedure. The term “judicial sale” generally means a regular lawsuit, usually in a district court, wherein the plaintiff/mortgagee asks the court to authorize and supervise a foreclosure auction. Non-judicial sales are the easiest and fastest. Quasi-judicial sales are slower and do involve a court order, however, the procedures for getting the court order are relatively simple and fast. Also, in a quasi-judicial foreclosure, the issues that the court can determine are strictly limited and the court must follow strict timelines in making the court’s decision. Judicial sales involve a regular lawsuit, which means that, unless the defendants default by failing to file a written answer, the lawsuit must be set for trial, which will likely take several months or even years.

Property Tax Loans

Under Section 32.065(c) of the Texas Tax Code, private property tax lenders are “prohibited from exercising a remedy of foreclosure or judicial sale where the transferring taxing unit would be prohibited from foreclosure or judicial sale.” Accordingly, private property tax lenders must follow the same judicial procedures that the taxing municipalities must follow in order to foreclose on a private property tax loan.

The Type of Foreclosure for a Property Tax Lien Changes Depending on the Date that the Loan was Originated. Property tax loans originated after May 29th, 2013 can no longer be foreclosed by quasi-judicial procedures under rules 735 and 736 of the Texas Rules of Civil Procedure because Senate Bill 247 (SB 247) of the 83rd Regular Legislative Session amended Section 32.06(c) of the Texas Tax Code to take out the parts authorizing quasi-judicial sales, which has the effect of limiting private property tax lenders to the same judicial foreclosure procedures that the taxing municipalities must follow. A copy of SB 247 can be found here.

Before September 1st, 2007, Section 32.06(c) of the Texas Tax Code provided that property tax lenders were “entitled to foreclose the lien . . . in the manner specified in Section 51.002, Property Code, and Section 32.065 of [the Tax Code].” Section 51.002 of the Texas Property Code is the section governing regular, nonjudicial trustee’s sales. Section 32.065 of the Tax Code contains various provisions related to tax lien foreclosures. So, private tax loans originated before September 1st of 2007 could be foreclosed nonjudicially.

Senate Bill 1520 (SB 1520), of the 80th Regular Session of the Texas Legislature, available here, went into effect on September 1st. 2007. Under SB 1520, Section 32.06(c) of the Texas Tax Code changed to say that property tax lenders were “entitled to foreclose the lien . . . in the manner specified in Section 51.002, Property Code, and Section 32.065 of [the Tax Code], after the transferee or a successor in interest obtains a court order for foreclosure under Rule 736, Texas Rules of Civil Procedure.” (emphasis added) Additionally, Section (c-1) was added to Texas Tax Code § 32.06 by SB 1520 to provide a few extra requirements on property tax lien foreclosures under Rule 736 that did not apply to home equity loans.

So, accordingly, from September 1st of 2007 to May 29th of 2013, private tax liens originated during that timeframe could be foreclosed quasi-judicially through the expedited judicial foreclosure process in Rules 735 and 736 of the Texas Rules of Civil Procedure. Private tax loans originated before September 1st of 2007 could be foreclosed nonjudicially.

The current procedures for foreclosing on a property tax lien are too complex and voluminous to explain in this article. Much of the time, private property tax lenders just wait for the taxing authorities to start the foreclosure process and then file a petition in intervention in the judicial foreclosure tax suit filed by the municipalities’ law firm. The private tax lenders then let the government’s law firm handle the details of the foreclosure sale. For a private tax lender to foreclose, they must follow the same procedures that the municipalities must follow.

Home Equity Loans

A home equity loan occurs when the borrower uses the borrower’s equity in the house (the difference between the value of the house and amounts owed on liens) to borrow cash as opposed to borrowing purchase money or funds necessary to refinance existing liens. Home equity loans were illegal in Texas until 1997. Home equity loans may not be foreclosed without a court order. See Tex. Const. art. XVI § 50(a)(6)(D). Under Tex. Const. art. XVI § 50(r), the Texas Supreme Court has been charged to “promulgate rules of civil procedure for expedited foreclosure proceedings related to foreclosure of liens . . . that require a court order.” The Texas Supreme Court did so with the promulgation of Rules 735 and 736 of the Texas Rules of Civil Procedure. The forms created by the Texas Supreme Court can be found here:

Reverse Mortgages

Under Tex. Const. art. XVI § 50(r), the Texas Supreme Court has been charged with promulgating rules for foreclosure of both home equity loans and reverse mortgages. The Texas Supreme Court has promulgated the same rules for both, being Rules 735 and 736 of the Texas Rules of Civil Procedure.

Homeowner’s Association Liens aka Property Owner’s Association Liens

Homeowner’s association liens (aka “HOA Liens”) cannot be foreclosed without a court order. Tex. Prop. Code § 209.0092(a) (Judicial Foreclosure Required). If the declarations create the authority for the association to exercise a power of sale, then the expedited foreclosure process under Rule 736 of the Texas Rules of Civil Procedure can be used. See id. Texas Property Code section 209.0092(a) is not written very clearly, but when read in context with subsections (d) and (e) seems to suggest that a power of sale must be in the dedicatory instruments in order to utilize the expedited quasi-judicial sale procedures of Tex. R. Civ. P. 736. Otherwise, the lien should be foreclosed by traditional judicial foreclosure. See Tex. Prop. Code § 209.0092(e). Most of the rules governing foreclosure of a Property Owners Association (POA) lien can be found in Title 11, Chapter 209 of the Texas Property Code, also known as the Texas Residential Property Owners Protection Act. Describing all of the procedures and requirements for foreclosure of a homeowner’s association lien under the Texas Residential Property Owners Protection Act (the POP Act), and other provisions of Title 11 of the Texas Property Code, goes beyond the scope of this article. A few important takeaways, however, include that:

(1) Foreclosure sale is prohibited if the debt securing the lien consists solely of “fines assessed by the association, attorney’s fees incurred by the association solely associated with fines assessed by the association, or amounts added to the owner’s account as an assessment under Texas Property Code Section 209.005(i) or 209.0057(b-4).” Tex. Prop. Code § 209.009;

(2) Even though Tex. Prop. Code § 204.010(a)(10) allows a homeowner’s association to “impose interest” and “late charges,” the remedy of foreclosure is not available for interest or late charges if interest and late charges are not referenced in the deed restrictions. Brooks v. Northglen Ass’n, 141 S.W.3d 158, 171 (Tex. 2004); and

(3) When a trustee conducts a nonjudicial foreclosure sale pursuant to a deed of trust, the trustee and lienholder typically have no obligation to notify junior lienholders, however, property owner’s associations do have a statutory duty to notify junior lienholders. Tex. Prop. Code § 209.0091.

Homesteads and HOA Liens. Homeowner’s association liens can be foreclosed against a homestead so long as the lien arises from dedicatory instruments on file at the time that the homeowner acquired the property. Inwood N. Homeowners’ Ass’n, Inc. v. Harris, 736 S.W.2d 632, 636 (Tex. 1987).

Condominium Association Liens

Unlike homeowner’s association liens, condominium liens can be foreclosed nonjudicially by trustee’s sale. Tex. Prop. Code § 82.113(d), (e). Condominium associations have greater statutory protections than homeowner’s associations because, with condominiums, the shared ownership of the common areas causes a greater need for enforcement of shared maintenance and other obligations. The condominium association rules are found in Title 7, Chapters 81 and 82 of the Texas Property Code. Chapter 82 is the Texas Uniform Condominium Act, while Chapter 81 applies to condominiums created before the adoption of the uniform condominium act (i.e., before January 1, 1994). Usually, the legal description in a condominium deed will refer to the property by a unit or building number rather than by a lot and block number for a subdivision. A condominium must have a declaration filed in the deed records, which typically references either the old Texas Condominium Act, the Texas Uniform Condominium Act, or some form of condominium regime. Tex. Prop. Code § 82.051(a).

The Statutory Condominium Lien. Unlike homeowner’s association liens, condominium liens can arise by statute even when the condominium declaration on file in the deed records fails to create a lien. Tex. Prop. Code § 82.113(a). The statutory lien is broad, defining “assessments” as including regular and special assessments as well as “does, fees, charges, interest, late fees, fines, collection costs, attorney’s fees, and any other amount due to the association by the unit owner or levied against the unit by the association.” Id. The lien encumbers not only the unit, but also any “rents and insurance proceeds received by the unit owner and relating to the owner’s unit.” Id. Condominium associations “may not foreclose a lien for assessments consisting solely of fines.” Id. at (e). The association can bid on the unit at the foreclosure sale as a common expense. Id. at (f).

Statutory Condominium Lien Priority. The statutory condominium lien has priority over any other lien except (1) property taxes, (2) encumbrances recorded before the condominium declaration is recorded, (3) “a first vendor’s lien or first deed of trust lien recorded before the date on which the assessment sought to be enforced becomes delinquent under the declaration, bylaws, or rules;” and (4) “unless the declaration provides otherwise, a lien for construction of improvements to the unit or an assignment of the right to insurance proceeds on the unit if the lien or assignment is recorded or duly perfected before the date on which the assessment sought to be enforced becomes delinquent under the declaration, bylaws, or rules.” Tex. Prop. Code § 82.113(b). Condominium associations, unlike property owners associations, generally do not have to notify junior lienholders of foreclosure sale, unless the declaration contains such requirement or the lienholder provides a written request for notice pursuant to Tex. Prop. Code § 82.113(h).


Foreclosure Type Matrix
Lien Type Foreclosure Type Citation
Property Tax Loans Originated after May 29th, 2013 Judicial Tex. Tax Code § 32.06(c); Senate Bill 247 (SB 247), 83rd Regular Session
Property Tax Loans Originated Between September 1st of 2007 and May 29th of 2013 Quasi-Judicial Tex. Tax Code § 32.06(c); Senate Bill 1520 (SB 1520), 80th Regular Session
Property Tax Loans Originated Before September 1st of 2007 Nonjudicial Tex. Tax Code § 32.06(c) prior to SB 1520, 80(R) and SB 247, 83(R)
Property Owner’s Association Lien Quasi-Judicial Tex. Prop. Code § 209.0092(a)
Condominium Association Lien Nonjudicial Tex. Prop. Code § 82.113(d), (e)
Home Equity Loan Quasi-Judicial Tex. Const. art. XVI § 50(r); Tex. Const. art. XVI § 50(a)(6)(D)
Reverse Mortgage Quasi-Judicial Tex. Const. art. XVI § 50(r); Tex. Const. art. XVI § 50(a)(6)(D)

Copyright, Ian Ghrist, 2018, All Rights Reserved. Unauthorized reproduction strictly prohibited.

Disclaimer: This document is for informational purposes only. Do not rely on any part of this document as legal advice. Instead, seek out the advice of a licensed attorney with regard to the particular facts and circumstances of your legal matter. Also, this information may be out-of-date or wrong and is not intended to be comprehensive or to address any potential or specific factual or legal scenario.

What to Know About the Dodd-Frank Act, the Truth in Lending Act, the Texas SAFE Act, TRID, and the Real Estate Settlement Procedures Act When Seller Financing Residential Real Estate in Texas

The Dodd-Frank Wall Street Reform and Consumer Protection Act (hereinafter “Dodd-Frank”)[1] was signed into law on July 21st, 2010 in response to the mortgage loan crisis. Dodd-Frank made sweeping changes to the Truth in Lending Act (hereinafter “TILA”). TILA was first codified in 1968, but the 2010 Dodd-Frank changes revolutionized the mortgage lending business. It was Dodd-Frank, together with the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (hereinafter the “SAFE Act”), that created Registered Mortgage Loan Originators (“RMLO”s). Before Dodd-Frank, mortgage loan officers often needed no licensure to practice their trade. Mortgage loan officers, before Dodd-Frank, had no legal duty to formally verify a borrower’s ability to repay (ATR) the loan.

This article should start with a disclaimer. The Dodd-Frank Act, the Truth in Lending Act, and the Real Estate Settlement Procedures Act (hereinafter “RESPA”) involve labyrinthian complexity. These laws require an intricate knowledge of the interplay between the Acts of Congress, the various sections of the United States Code where those Acts of Congress are codified as law, the regulations promulgated by the various federal agencies tasked with implementing the Acts of Congress, and the official regulatory commentary to those regulations and laws.

To start, when Congress enacts a law that law has a public law number attached to it. That public law becomes part of an Act of Congress, which usually has a statement of purpose and some organizational structure to it. Lawyers, however, do not use catalogues of Acts of Congress to do their jobs. Instead, for convenience, these Acts of Congress are incorporated into a single book of law called the Code of Laws of the United States of America, i.e., the United States Code, or “U.S.C.” for short. So, you might be reading an article about the ability-to-repay (ATR) rules that Dodd-Frank created and you might hear those referred to as Section 129C of the Truth in Lending Act; as Title 15, Section 1639c of the United States Code (15 U.S.C. § 1639c); or as Section 1411 of Dodd-Frank. Those all refer to the same law, just different ways to reference the same law. In connection with Dodd-Frank, you will also read about Regulation X (Real Estate Settlement Procedures Act), and Regulation Z (mostly the Truth in Lending Act). Title 12, Part 1026 of the Code of Federal Regulations is also known as Regulation Z (hereinafter “Reg Z”).[2] So, if you see a citation for 12 C.F.R. § 1026, then you know that the citation comes from Regulation Z. Similarly, Title 12, Part 1024 of the Code of Federal Regulations is known as Regulation X, so, 12 C.F.R. 1024 refers to regulations related to the Real Estate Settlement Procedures Act. This article in no way purports to comprehensively explain the various laws and regulations discussed, and accordingly, do not rely on this article without undergoing a comprehensive evaluation of every law and regulation that could apply to your situation. This article generally describes the foregoing laws and regulations yet does not explain what to do in any particular situation.

Codification. The Truth in Lending Act is contained in Title I of the Consumer Credit Protection Act, as amended, found in 15 U.S.C. 1601 et. seq. The Real Estate Settlement Procedures Act of 1974, as amended, can be found in 12 U.S.C. 2601 et. seq.

To make matters more confusing, the Code of Federal Regulations contains different, yet often identical, sections of TILA and Reg Z for different agencies. So, there are, in fact, two different versions of Reg Z—one for the Federal Reserve System and one for the Consumer Financial Protection Bureau. This gets very confusing when you are doing legal research and seeing both sections being cited. Chapter II of Title 12 of the Code of Federal Regulations is titled “Federal Reserve System” while Chapter X of Title 12 of same is titled “Bureau of Consumer Financial Protection” (hereinafter the CFPB). Section 226 of Title 12 is Reg Z for the Federal Reserve System while Section 1026 of Title 12 is Reg Z for the CFPB. But, if you look at the definitions, like the definition of “creditor,” in 12 CFR 1026.2 then you will see that it is nearly identical to the definitions in 12 CFR 226.2.

The Difference Between High-Cost Loans and Higher-Priced Loans and Why it Matters. “The Home Ownership and Equity Protection Act (hereinafter “HOEPA”) was enacted in 1994 as an amendment to TILA to address abusive practices in refinances and closed-end home equity loans with high interest rates or high fees.”[3] The Dodd-Frank Act expanded HOEPA coverage to include purchase-money mortgages and home equity lines of credit. Dodd-Frank also imposed extensive new requirements for HOEPA loans, like the requirement that all HOEPA loan borrowers must complete an approved homeownership counseling program. The Dodd-Frank Act uses the term “high-cost mortgages,” in Title XIV, Subtitle C, to refer to loans subject to HOEPA. These high-cost, HOEPA loans are also referred to as “Section 32 loans” because the section of Regulation Z covering such loans is 12 C.F.R. § 1026.32. Regulation Z has another category of loans called “higher-priced mortgage loans” found in 12 C.F.R. § 1026.35. So, you could refer to those as “Section 35 loans.” A detailed analysis of the regulatory requirements for High Cost Loans compared to Higher Priced Loans, or other loans, goes beyond the scope of this article.[4] For purposes of this article, the reader need only understand that High-Cost Loans have much higher interest rates and fees than Higher-Priced Loans. High-Cost Loans also have much more burdensome rules and regulations attached. Lenders generally consider the rules and regulations for Higher-Priced Loans to be an annoyance. Lenders generally consider the rules and regulations for High-Cost Loans to be extremely cumbersome and potentially deal-breaking. High-Cost Loan deals often fall apart due to the borrower’s inability to complete all requirements, like obtaining a homeownership counseling program completion certificate and delivering it to the lender. Because doing even one High Cost Loan can break a small lender’s de minimus Dodd-Frank exemption, many seller financiers avoid High-Cost Loans like the plague.

Damages in a TILA Private Cause of Action. A private cause of action exists for TILA violations. Generally, mortgage lending damages are actual damages plus twice the amount of any “finance charge,” capped at $4,000.00. 15 U.S.C. § 1640(a)(2)(A)(i). The term “finance charge” in TILA is a term of art, defined in 12 C.F.R. § 1026.4 and 15 U.S.C. § 1605. Finance charge generally means whatever the borrower pays to get the loan, including interest, points, origination fees, etcetera. Attorney’s fees and costs are also generally recoverable by the borrower on a TILA claim. The Section 1640(a)(2)(A)(i) damages are not particularly scary due to the cap on potential liability. Lenders have something to fear, however, in the uncapped Section 1640(a)(4) damages. The (a)(4) damages are “[A]n amount equal to the sum of all finance charges and fees paid by the consumer, unless the creditor demonstrates that the failure to comply is not material.” Section (a)(4) damages only apply for violations of Section 129 of TILA (codified at 15 U.S.C. § 1639) (laundry list of TILA requirements), Section 129B(c) ¶ (1) or (2) (codified at 15 U.S.C. § 1639b(c)) (prohibition on steering incentives for mortgage originators), or Section 129C(a) (codified at 15 U.S.C. § 1639c(a)) (Ability-to-Repay requirements). The standard TILA damages (15 U.S.C. 1640(a)(1) and (a)(2)) have a class action damages cap for the statutory portion of damages.

Creditor Defenses. Borrower fraud or deception can be a defense to a TILA cause of action. 15 U.S.C. § 1640(l). Creditors cannot be liable, generally, if the violation results from a bona fide error, despite reasonable procedures designed to avoid such errors. 15 U.S.C. § 1640(c). This generally includes clerical and calculation errors, but not errors of legal judgment. Id. Good faith compliance with CFPB rules or interpretations can also be a defense. 15 U.S.C. § 1640(f).

Statute of Limitations on Truth in Lending Act Claims. TILA claims related to mortgage loan origination have a one-year statute of limitations, unless the three-year exception applies. TILA Sec. 130; 15 U.S.C. § 1640(e). The three year exception applies to TILA Sec. 129 (codified at 15 U.S.C. § 1639) (a laundry list of various TILA requirements), TILA Sec. 129B (codified at 15 U.S.C. § 1639b) (mostly the prohibition on steering incentives for mortgage originators), and TILA Sec. 129C (codified at 15 U.S.C. § 1639c) (mostly the Ability-to-Repay rules).

From the foregoing information on private causes of action damages under TILA and the statute of limitations on those damages, you probably figured out which parts of TILA lenders worry most about—Sections 129, 129B, and 129C. In other words, lender’s primary liability concerns include: (1) the ability to repay rules, (2) the steering incentives, and (3) the laundry list of TILA requirements. Each of those three concerns needs their own article. Accordingly, this article glosses over them.

The Ability-to-Repay (ATR) Rules. In a nutshell, these rules require lenders to investigate whether their borrowers have the ability to repay a loan before the lender gives the loan. Congress found that lenders gave loans to borrowers who had no hope of ever repaying the loan only to sell the loan to a securitized fund and, thus, escape liability when the borrower inevitably defaulted. Congress found that putting such bad debt into securities that retirement funds purchased put the American public’s nest eggs in jeopardy. The ATR rules are supposed to address this problem. Now, doing ATR, generally, means checking the borrower’s income, assets, credit, expenses, and ability to repay the loan. Lenders must do this now or face a private cause of action under TILA.

Steering Incentives. “Before the financial crisis, many mortgage borrowers were steered towards risky and high-cost loans because it meant more money for the loan originator,” said CFPB Director Richard Cordray. “These rules will hold loan originators more accountable by banning the incentives that led so many of them to direct consumers toward disaster.”[5]

Laundry List of TILA Requirements. These rules regulate everything from balloon payments to late fees to negative amortization and everything in between. The rules also cover what disclosures the borrowers must receive and when the borrowers must receive them. Note that several of these rules apply only to high-cost mortgages.

Mortgage Note Buyers/Assignees. Mortgage note buyers care greatly about the statute of limitations on TILA claims. Even badly originated loans with subpar paperwork can become marketable after enough time passes. In the mortgage loan buying industry, sometimes referred to as the secondary market, this passage of time is referred to sometimes as “seasoning.” Prospective note buyers look favorably on the purchase of seasoned notes not just because the passage of time can cure origination deficiencies, but also because a solid payment history in the initial years demonstrates the borrower’s ability-to-repay better than any form of pre-origination underwriting. Mortgage underwriting generally refers to the process of measuring risk exposure from the lender’s standpoint, including analysis of the borrower’s ability-to-repay the loan. If you do a large volume of owner-financing and hope to resell notes or packages of notes into the secondary market, then paying attention to assignee liability is of critical importance. Assignees never totally escape exposure due to limitations because, under 15 U.S.C. § 1640(k), the borrower can always raise a § 1639b(c) (steering incentives) or § 1639c(a) (ability-to-repay) claim, regardless of limitations. However, borrowers can only raise a claim under § 1640(k) that would normally be barred by limitations “as a matter of defense by recoupment or set off” in a creditor’s or assignee’s “judicial or nonjudicial foreclosure . . . or any other action to collect the debt.” In other words, the borrower cannot file a private cause of action that survived limitations due to § 1640(k) against the lender. The borrower can only use such a claim to offset the amount owed to the lender in a foreclosure or other suit by the lender against the borrower.

Assignee Liability. Assignees of mortgage loans are generally only liable for TILA violations when “the violation for which such action or proceeding is brought is apparent on the face of the disclosure statement.” 15 U.S.C. § 1641(a), (e). Under § 1641(c), assignees always take the mortgage subject to rescission claims under § 1635. Assignees of HOEPA High-Cost loans (TILA § 103(bb)) (15 U.S.C. § 1602(bb)) are “subject to all claims and defenses” that the original creditor is subject to “unless the . . . assignee demonstrates . . . that a reasonable person exercising ordinary due diligence, could not determine” that the loan was a High-Cost Mortgage. 15 U.S.C. § 1641(d)(1). Any person who assigns a high-cost loan “shall include a prominent notice of the potential liability.” 15 U.S.C. § 1641(d)(4).

Rescission Claims Under 15 U.S.C. § 1635. Borrowers have, under 15 U.S.C. § 1635, “an unconditional right to rescind for three days, after which they may rescind only if the lender failed to satisfy the Act’s disclosure requirements. But this conditional right to rescind does not last forever. Even if a lender never makes the required disclosures, the ‘right of rescission shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever comes first.’ § 1635(f).” Jesinoski v. Countrywide Home Loans, Inc., 135 S. Ct. 790, 792 (2015). The borrower does not need to file suit to rescind. Id. The borrower can rescind merely by notifying the creditor of the borrower’s intention to rescind. Id.

Does Dodd-Frank Even Apply to Me? The private causes of action available under TILA apply only to “any creditor who fails to comply . . . .” 15 U.S.C. § 1640(a) (emphasis added). So, if you are not a “creditor,” as defined by the Code, then you can escape liability. The definition of “creditor” is found in 15 U.S.C. § 1602(g) (formerly 1602(f)); 12 C.F.R. § 1026.2(a)(17). Note that Section 1602(g) of the U.S. Code appears to currently refer to high-cost loans as “subsection (aa)” loans, but subsection (aa) was changed to (bb) apparently without updating Section 1602(g).[6] A person is a “creditor” for Reg Z purposes when:

  1. A person (1) “regularly extends” consumer credit . . . and (2) is the person “to whom the obligation is initially payable.”
  2. A person “regularly extends” consumer credit if it extended credit . . . “more than 5 times for transactions secured by a dwelling” in “the preceding calendar year,” or a person “regularly extends” consumer credit if, in any 12-month period, the person “originates more than one” high-cost loan, i.e., Section 32 loan or “one or more such credit extensions through a mortgage broker.”

12 C.F.R. § 1026.2(a)(17).

So, basically, Dodd-Frank applies if you do more than five owner finance deals annually, or you do two high-cost loans in a year or one high cost loan through a broker.

The creditor definition applies only to the “person to whom the debt arising from the consumer credit transaction is initially payable . . . .,” which has been interpreted as not applying to mortgage brokers even when the broker was a creditor in an unrelated transaction. Cetto v. LaSalle Bank Nat. Ass’n, 518 F.3d 263, 269 (4th Cir. 2008). Attorneys are also generally not creditors under the TILA definition. Mauro v. Countrywide Home Loans, Inc., 727 F. Supp. 2d 145, 157 (E.D.N.Y. 2010).

Seller-Finance Exemptions for the Truth-in-Lending Act. There are two Reg Z exceptions that specifically apply to seller finance. First, anyone who seller finances three or fewer properties in any 12-month period who is not a developer and who does fully amortizing loans with good faith ATR and meets the adjustable rate requirements is “not a loan originator.” 12 CFR 1026.36(a)(4). Second, anyone who provides seller-financing for only one property in any 12-month period is “not a loan originator” when the person is not a developer, meets the adjustable rate requirements, and “[t]he financing has a repayment schedule that does not result in negative amortization.” 12 CFR 1026.36(a)(5). So, basically, if you only do one seller-finance deal in a year then you do not have to do ATR. Note that the seller-finance exemptions to “loan originator” status only relate to the loan originator rules. Status as a “creditor” to which a TILA private cause of action can apply is different from status as a “loan originator” to which the loan originator rules apply.

What is the SAFE Act and What are Registered Mortgage Loan Originators (RMLOs)? The Secure and Fair Enforcement for Mortgage Licensing Act (hereinafter the “SAFE Act”) went into effect on July 30th, 2008. This federal law required all states to pass mortgage licensing laws meeting or exceeding federal standards. Texas passed the Texas Secure & Fair Enforcement for Mortgage Licensing Act (hereinafter the “Texas Safe Act” or “T-Safe”) in 2009 in response to the federal SAFE Act.[7] The SAFE Act gave rise to the Nationwide Mortgage Licensing System and Registry (hereinafter the “NMLS”). The NMLS is a database for licensure to conduct mortgage lending business. A licensee in Texas under the NMLS is commonly referred to as a Registered Mortgage Loan Originator (“RMLO”). Generally, to become an RMLO requires education, testing, and a background check.

When Do I Need an RMLO to Do an Owner-Financed Sale of Residential Real Estate? Usually, when you seller-finance “no more than five residential mortgage loans” in “any 12-consecutive-month period” then you are exempt from T-Safe. Tex. Fin. Code § 180.003(a)(5), (6); Tex. Fin. Code § 156.202(a-1)(3). If you are exempt and do not have to use an RMLO, then you should seriously consider using an RMLO anyways, just to make sure that you comply with the myriad other laws that may apply even if T-Safe does not. Under Tex. Fin. Code § 156.201(a), “A person may not act in the capacity of, engage in the business of, or advertise or hold that person out as engaging in or conducting the business of a residential mortgage loan company in this state unless the person holds an active residential mortgage loan company license, is registered under Section 156.2012, or is exempt under Section 156.202.” Essentially, if you “engage in business as a residential mortgage loan originator with respect to a dwelling located in [Texas],”[8] then you need to have a Texas RMLO license registered with the NMLS. Attorneys are exempt from RMLO registration, but only when they negotiate the terms of a residential mortgage loan on behalf of a client as an ancillary matter unless the attorney takes “a residential loan application,” and “offers or negotiates the terms of a residential mortgage loan.” Tex. Fin. Code § 180.003(a)(3). You can also offer or negotiate the terms of a residential mortgage loan “with or on behalf of an immediate family member” without having to become an RMLO. Tex. Fin Code § 180.003(a)(2). In sum, if you do more than five owner-finance deals in a year, then you have to use an RMLO. Even if you use an RMLO, you should avoid taking applications and negotiating the loan terms with the borrowers—let the RMLO do that. Tex. Fin. Code § 180.002(19)(A) (defining an RMLO as an individual that “takes a residential mortgage loan application” or “offers or negotiates the terms of a residential mortgage loan”).

Private Civil Causes of Action for T-Safe Violations. The government has a plethora of options for enforcement of T-Safe violations. Mortgage applicants, however, are limited to the statutorily authorized private civil cause of action, under T-Safe, for “recovery of actual monetary damages and reasonable attorney’s fees and court costs” together with “an action to enjoin a violation.” Tex. Fin. Code § 156.402.

When Does the Real Estate Settlement Procedures Act (RESPA) Apply? The Real Estate Settlement Procedures Act was enacted in 1974 and, like many statutes, got a makeover from the Dodd-Frank Act in 2010. RESPA was originally administered by the Department of Housing and Urban Development (HUD), but Dodd-Frank turned RESPA administration over to the Consumer Financial Protection Bureau (CFPB). The CFPB promptly replaced the HUD-1 Statements and Good Faith Estimates (GFEs) that everyone had become accustomed to seeing at nearly every real estate closing with the descriptively-named Closing Disclosure and Loan Estimate. While RESPA primarily governs the closing disclosures and loan estimates used at most real estate closings, RESPA also, in 12 U.S.C. § 2605, regulates mortgage loan servicers, particularly servicers of “federally related mortgage loans.” 12 U.S.C. § 2605. A “federally related mortgage loan” is defined at 12 U.S.C. § 2602(1); 12 C.F.R. 1024.2. Federally-related mortgage loans mostly consist of loans for residential property that are insured by the federal government or originated by an entity regulated by the federal government but can also consist of loans by any creditor (including seller-financiers) that makes or invests in residential real estate loans aggregating more than $1,000,000.00 per year. 12 C.F.R. § 1024.2(1)(ii)(D). A mortgage broker can originate a seller-financed loan without the loan becoming a “federally related loan” if the loan is not intended for assignment to an entity that originates federally related loans. 12 C.F.R. § 1024.2(1)(ii)(E).

RESPA Exemptions. Business purpose loans, temporary financing (like certain construction loans), vacant land loans, and some loan modifications where a new note is not required are all exempt from RESPA coverage. 12 C.F.R. § 1024.5(b).

Private Causes of Action Under the Real Estate Settlement Procedures Act (RESPA). Private causes of action exist only for certain categories of RESPA violations. Section 6 of RESPA (12 U.S.C. § 2605) (rules regarding mortgage loan servicing and qualified written requests for information from borrowers) allows a private action to recover actual damages and “any additional damages, as the court may allow, in the case of a pattern or practice of noncompliance . . . in an amount not to exceed $2,000” and costs and attorneys fees. 12 U.S.C. § 2605(f). The circuit courts are split over whether Section 10 of RESPA (12 U.S.C. § 2609) (limiting lender requirements for advance escrow deposits) creates a private cause of action. The Fifth Circuit, which governs the State of Texas, subscribes to the majority view that no private cause of action exists for violations of Section 10 of RESPA. State of La. v. Litton Mortg. Co., 50 F.3d 1298, 1301 (5th Cir. 1995). An express private cause of action exists for violations of Section 8 of RESPA (12 U.S.C. § 2607) (Prohibition against kickbacks and unearned fees), including recovery of “three times the amount of any charge paid for such settlement service” and “court costs of the action together with reasonable attorneys fees.” 12 U.S.C. § 2607(d)(2), (5). Section 9 of RESPA (12 U.S.C. § 2608) prohibits sellers from telling the buyer which title company to purchase title insurance from and provides a private cause of action to buyers of “three times all charges made for such title insurance.” 12 U.S.C. § 2608(b). Limitations on RESPA private causes of action are one year for section 2607 or 2608 violations and three years for section 2605 violations. 12 U.S.C. § 2614. While private causes of action under RESPA are limited to certain sections of RESPA, the government has broad authority to enforce RESPA.

What is the TILA-RESPA Integrated Disclosure Rule (TRID)? TRID is a rule created by the Consumer Financial Protection Bureau, pursuant to Dodd-Frank, to combine existing disclosure requirements, implement new Dodd-Frank disclosure requirements, and guide entities making the transition to the new disclosures. TRID essentially created and governs, together with amendments to Reg Z and Reg X, the Closing Disclosure and the Loan Estimate. Most of the rules regarding the use of these forms are part of TRID. TRID can be found in the Federal Register at 78 FR 79730. TRID is very long and not easily summarized. Accordingly, a summary of TRID goes beyond the scope of this article. TRID is supposed to simplify and clarify real estate closings for borrowers. TRID requires that the Loan Estimate be delivered or placed in the mail no later than the third business day after receiving the consumer’s application and that the Closing Disclosure be provided to the consumer at least three business days prior to consummation of the transaction. TRID applies to “creditors” as defined by Reg Z, so persons making five or fewer mortgages in a year are generally exempt, though RESPA would still apply to them if the deal involves a “federally related mortgage loan.”

What is a Qualified Mortgage (QM)? Qualified Mortgage loans (QM loans) are presumed to comply with the ability-to-repay rules. Accordingly, the QM loan rules create a safe harbor for lenders. If lenders generate QM loans, then generally, such lenders have no need to fear ATR-related TILA lawsuits. The QM rules are generally found at 12 C.F.R. § 1026.43(e) (Reg. Z) and 15 U.S.C. § 1639c. Generally, QM loans cannot have an interest-only period, negative amortization, balloon payments, or terms longer than thirty years, among other things. Checking a borrower’s debt-to-income ratio (DTI) is particularly important for small creditors hoping to generate QM loans. Generally, higher-priced loans (as defined in 12 C.F.R. § 1026.43(b)(4)) receive only a rebuttable presumption of ATR compliance while non-higher-priced loans receive a conclusive presumption of compliance—a true safe harbor. A comprehensive explanation of the QM loan rules goes beyond the scope of this article. Hire a competent RMLO to help you generate QM loans.

Appraisal Rules. Appraisal requirements are in 15 U.S.C. § 1639e and 12 C.F.R. § 1026.35. They are generally not required for QM loans. 15 U.S.C. § 1639c.

Credit Checks. Credit checks are part of the ability to repay rule. 15 U.S.C. 1639c(a). Credit checks are not necessarily required if the lender uses other reasonably reliable third-party sources like rental payment history or public utility payments. 12 C.F.R. § 1026.43 requires that third-party records be used to verify ability to repay. Official interpretation 1026.43(c)(3)-7 states that “To verify credit history, a creditor may, for example, look to credit reports from credit bureaus or to reasonably reliable third-party records that evidence nontraditional credit references, such as evidence of rental payment history or public utility payments.”

Pre-Loan Counseling and Unintentional HOEPA Violations. The pre-loan counseling requirements are found in 15 U.S.C. § 1639(u). The Section 1640(a)(4) damages can apply to the failure to meet the counseling requirement, so even though counseling certificates are likely the easiest HOEPA rule to ignore, they are pretty important. Creditors and assignees in high-cost mortgages can, generally, cure violations of Section 129 of the Dodd-Frank Act by the procedures in 12 C.F.R. § 1026.31(h) if the creditor acted in good faith or the violation was unintentional.

Links to the Laws (Please Note That These May Not be the Most Up to Date Versions of the Laws):
The Dodd-Frank Act
The Truth in Lending Act
The Real Estate Settlement Procedures Act



[3] Small Entity Compliance Guide – 2013 Home Ownership and Equity Protection Act (HOEPA) Rule, Consumer Financial Protection Bureau (May 2nd, 2013)

[4]–Higher-Priced-Mortgages/ (list of differences between high-cost and higher-priced loans).

[5] CFPB Issuing Rules to Prevent Loan Originators from Steering Consumers into Risky Mortgages, CFPB Newsroom Press Release (Jan. 18, 2013) (

[6] DODD–FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT, PL 111-203, July 21, 2010, 124 Stat 1376 (Sec. 1100A. Amendments to the Truth in Lending Act provides that “The Truth in Lending Act (15 U.S.C. 1601 et seq.) is amended— (1) in section 103 (15 U.S.C. 1602)—<< 15 USCA § 1602 >> (A) by redesignating subsections (b) through (bb) as subsections (c) through (cc), respectively; and << 15 USCA § 1602 >> (B) by inserting after subsection (a) the following: “(b) BUREAU.—The term ‘Bureau’ means the Bureau of Consumer Financial Protection.”) (So apparently, a new subsection (b) was added to define the Consumer Financial Protection Bureau and all other sections were moved, so (f) became (g) and (aa) became (bb), but Congress seems to have forgotten to change the reference to high-cost loans in 1602(g) (formerly 1602(f)) to (bb) from (aa)).

[7] See Texas Finance Code, Title 3, Subtitle E, Chapter 180, Subchapter A. Additionally, Texas has the “Residential Mortgage Loan Company Licensing and Registration Act” located at Texas Finance Code, Title 3, Subtitle E, Chapter 156, Subchapter A.

[8] Tex. Fin Code § 180.051(a).

Copyright, Ian Ghrist, 2018, All Rights Reserved. Unauthorized reproduction strictly prohibited.

Disclaimer: This document is for informational purposes only. Do not rely on any part of this document as legal advice. Instead, seek out the advice of a licensed attorney with regard to the particular facts and circumstances of your legal matter. Also, this information may be out-of-date or wrong and is not intended to be comprehensive or to address any potential or specific factual or legal scenario.

Texas Residential Construction Liability Act (RCLA) Notice, Settlement, and Litigation Procedures

Disputes regarding residential construction defects require the use of special procedures. Homeowners and developers must understand and utilize the procedures in the Texas Residential Construction Liability Act (“RCLA”) (Tex. Prop. Code §§ 27.001 to 27.007), particularly the pre-litigation notice and settlement offer procedures.

The definition of a “construction defect” (found in Tex. Prop. Code § 27.001(4)) that the RCLA applies to is so broad that it “need not necessarily involve defective construction or repair.” Timmerman v. Dale, 397 S.W.3d 327, 331 (Tex. App.—Dallas 2013).

In a normal breach of contract or Deceptive Trade Practices Act (“DTPA”) case, the plaintiff can recover for the injuries that the plaintiff suffered, but in an RCLA case, the plaintiff can recover only the damages items on the list in Tex. Prop. Code § 27.004(g). Timmerman, 397 S.W.3d at 331.

The contractor who fails to make a reasonable settlement offer after receiving an RCLA notice “loses the benefit of all limitations on damages and defenses to liability provided for in section 27.004, including both the limitation . . . on the types of damages recoverable . . . and the limitation . . . on the amount of damages recoverable . . . .” Perry Homes v. Alwattari, 33 S.W.3d 376, 384 (Tex. App. 2000); Tex. Prop. Code § 27.004(f) (“If a contractor fails to make a reasonable offer under Subsection (b), the limitations on damages provided for in Subsection (e) shall not apply.”).

The damages categories allowed by the RCLA include the following:

“(1) the reasonable cost of repairs necessary to cure any construction defect;

(2) the reasonable and necessary cost for the replacement or repair of any damaged goods in the residence;

(3) reasonable and necessary engineering and consulting fees;

(4) the reasonable expenses of temporary housing reasonably necessary during the repair period;

(5) the reduction in current market value, if any, after the construction defect is repaired if the construction defect is a structural failure; and

(6) reasonable and necessary attorney’s fees.”

Tex. Prop. Code Ann. § 27.004.

Under breach of contract, the homeowner generally must demonstrate that either the warranty of good and workmanlike construction or the warranty of habitability has been breached. “A homebuilder impliedly warrants that a new house has been constructed in a good and workmanlike manner and is suitable for human habitation.” Yost v. Jered Custom Homes, 399 S.W.3d 653, 662 (Tex. App.—Dallas 2013). The Texas Supreme Court has held that homeowners cannot waive or disclaim the warranty of good and workmanlike manner of performance. The Melody Homes decision largely relied upon Tex. Bus. & Com. Code Ann. § 17.42, which provides that consumers generally cannot waive provisions of the DTPA, including the breach of warranty provisions (Tex. Bus. & Com. Code § 17.50(a)(2)). While the warranty cannot be disclaimed outright, it can be superseded by a contract that fills gaps in the warranty. Gonzales v. Sw. Olshan Found. Repair Co., LLC, 400 S.W.3d 52, 59 (Tex. 2013). To supercede the implied warranty, an express warranty must “specifically describe the manner, performance, or quality of the services.” Id.

In a DTPA suit, the homeowner needs only to meet the “producing cause” standard. Metro Allied Ins. Agency, Inc. v. Lin, 304 S.W.3d 830, 834 (Tex. 2009). “Producing cause” means only cause-in-fact, whereas, the normal “proximate cause” of damages standard requires both cause-in-fact and “foreseeability.” Blue Star Operating Co. v. Tetra Techs., Inc., 119 S.W.3d 916, 920 (Tex. App. 2003). Accordingly, a residential construction defect case is easier to win on a DTPA theory than another theory because the plaintiff does not have to show that the contractor should have anticipated the damages. “Foreseeability requires that the actor, as a person of ordinary intelligence, would have anticipated the danger that his negligent act created for others.”

Notice and Settlement Procedure, Residential Construction Liability Act

Action Timing
Written notice by certified mail, return receipt requested, to the contractor, at the contractor’s last known address, specifying in reasonable detail the construction defects that are the subject of the complaint. Tex. Prop. Code § 27.004. Sixty days preceding the date a claimant seeking from a contractor damages or other relief arising from a construction defect initiates an action. Tex. Prop. Code § 27.004(a).
Claimant shall provide to the contractor any evidence that depicts the nature and cause of the defect and the nature and extent of repairs necessary to remedy the defect, including expert reports, photographs, and videotapes, if discoverable under T.R.C.P. 192. On the request of the contractor. Id.
The contractor shall be given a reasonable opportunity to inspect the property to determine the nature and cause of the defect and the nature and extent of repairs necessary to remedy the defect. Id. During the 35-day period after the contractor has received the written notice, upon the written request of the contractor. Id.
Contractor may make a written offer of settlement to the claimant. The offer must be sent to the claimant at the claimant’s last known address or to the claimant’s attorney by certified mail, return receipt requested. The offer may include either an agreement to repair or have repaired partially or totally at the contractor’s expense or at a reduced rate any construction defect and shall describe in reasonable detail the kind of repairs to be made. Tex. Prop. Code § 27.004(b). Not later than the 45th day after the date the contractor receives the pre-suit notice. Tex. Prop. Code § 27.004(b).


An offer not accepted before the 25th day after the date the offer is received by the claimant is considered rejected. Tex. Prop. Code § 27.004(i).

Any repairs in the proposed settlement Shall be made not later than the 45th day after the date the contracter receives written notice of acceptance of the settlement offer, unless completion is delayed by the claimant or by other events beyond the control of the contractor. Id.
If the claimant considers the settlement offer to be unreasonable then the claimant shall advise the contractor in writing and in reasonable detail of the reasons why the claimant considers the offer unreasonable. Id.(1). On or before the 25th day after the date the claimant receives the offer. Id.(1).
The contractor may make a supplemental written offer of settlement to the claimant by sending the offer to the claimant or the claimant’s attorney. Id.(2). Not later than the 10th day after the date the contractor receives notice of why the claimant considers the initial offer unreasonable. Id.(2).

Copyright 2018, Ian Ghrist, All Rights Reserved.

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.

Common Community Property Issues in Texas Real Estate Law

When buying and selling real property in Texas, a working knowledge of Texas marital property law can be helpful. Texas is one of nine of the United States using a community property system for marital property. The rest of the states have laws regarding equitable distribution. The equitable distribution laws govern how property is distributed to the spouses upon divorce. In states that do not have a community property system, all property of each spouse is treated as separate property, subject to equitable distribution upon divorce.

Community Property

In Texas, “property, other than separate property, acquired by either spouse during marriage” is community property. Tex. Fam. Code Ann. § 3.002. In Texas, just about any property acquired by either spouse during the marriage becomes community property owned by both spouses. Each spouse owns the community property jointly with the other spouse. In the case of real property acquired by the spouses during the marriage, Texas community property law allows for one spouse to own property jointly with the other as community property even when one spouse is left completely off of the deeds and other instruments in the chain-of-title. These unrecorded community property interests can cause some of the most pernicious Texas marital property issues that drive title attorneys wild. All community property that the spouses acquire during marriage is often referred to as the “community estate,” while the separate property of each spouse is referred to as that spouse’s “separate estate.”

Separate Property

Generally, separate property is property owned prior to the marriage or acquired during the marriage by gift or inheritance. In the event of a dissolution of marriage, a court cannot divest a spouse of his or her separate property. Eggemeyer v. Eggemeyer, 554 S.W.2d 137 (Tex. 1977); Leighton v. Leighton, 921 S.W.2d 365 (Tex. App.—Houston [1st Dist.] 1996); McElwee v. McElwee, 911 S.W.2d 182 (Tex. App.—Houston [1st Dist.] 1995, writ denied).

Economic Contribution or Reimbursement Claims—Typically Arising When One Spouse Buys Real Estate Prior to Marriage With a Loan, and Then Pays the Loan Off During the Marriage

Real property acquired before the marriage is separate property even if the property is refinanced during the marriage. In re Marriage of Jordan, 264 S.W.3d 850, 856 (Tex. App. 2008), overruled on other grounds by Matter of Marriage of Ramsey & Echols, 487 S.W.3d 762 (Tex. App. 2016). A refinance may give rise to a claim for economic contribution or reimbursement of any community funds paid toward the refinanced debt, but this contribution claim does not affect the characterization of the property as separate property. Id.; also see Tex. Fam. Code § 3.404. Property purchased before marriage remains separate property even when part of the unpaid purchase price is paid during marriage from community funds because the status of property as being either separate or community is determined at the time of its acquisition, and such status is fixed by the facts of its acquisition. Villarreal v. Villarreal, 618 S.W.2d 99 (Tex. Civ. App.—Corpus Christi 1981, no writ). The proceeds of the sale of separate property remain the separate property of the spouse whose property was sold. Scott v. Scott, 805 S.W.2d 835 (Tex. App.—Waco 1991, writ denied).

There is consensus among the courts of appeals that advances for interest expense, taxes, or insurance on property owned by either of the separate estates is offset by any benefit conferred on the community from use of the property. § 14.9.Establishing and measuring the right of reimbursement for funds advanced, 38 Tex. Prac., Marital Property And Homesteads § 14.9 (aggregating voluminous caselaw on the subject). This consensus appears to have been more-or-less codified in the 2009 reimbursement statute. Tex. Fam. Code Ann. § 3.402(c). Caselaw subsequent to the 2009 reimbursement statute acknowledges that the new statute continues the rule that benefits to the community estate must be recognized and offset where the community estate seeks reimbursement for interest, taxes, or insurance. Barras v. Barras, 396 S.W.3d 154, 177 n. 17 (Tex. App.—Houston 2013). “An equitable right of reimbursement is created where a marital estate advances moneys to pay expenses of another marital estate. This right of reimbursement is generally measured by the amount of the funds advanced. However, where moneys are advanced to benefit property owned by another estate and the property benefited is also used by the advancing estate, a right of offset for the benefit from such use may be created against the advancing estate. This offset right is most often asserted successfully where the advancing estate uses property rent-free for which it advances moneys to pay taxes and interest.” § 14.8.Introduction to the right of reimbursement for funds advanced, 38 Tex. Prac., Marital Property And Homesteads § 14.8. Furthermore, a reimbursement claim does not give the claimant a legal proprietary interest in the separate property, but rather merely a right of reimbursement. Id.; Marburger v. Seminole Pipeline Co., 957 S.W.2d 82, 139 O.G.R. 618 (Tex. App.—Houston [14th Dist.] 1997, pet. denied); Tex. Fam. Code Ann. § 3.404.

Rental Income

Income from separate property accruing during marriage is community property. In re Marriage of Cigainero, 305 S.W.3d 798, 802 (Ct. App.—Texarkana 2010). Accordingly, where a mortgage loan used for purchase of separate property prior to marriage is paid down using income accumulated during the marriage, the community estate may be entitled to reimbursement for those payments as the payments did not come from separate property. Id.


Separate property commingled with community property remains separate property as long as its identity can be traced. Jones v. Jones, 890 S.W.2d 471 (Tex. App.—Corpus Christi 1994, writ denied). However, where separate property has become so commingled with community property as to defy segregation and identification, the entire property is presumed to be community property. Estate of Hanau v. Hanau, 730 S.W.2d 663 (Tex. 1987); Gutierrez v. Gutierrez, 791 S.W.2d 659 (Tex. App.—San Antonio 1990, no writ). Thus, as long as the separate funds can be traced, they may be deposited in a joint account without losing their character as separate property. Celso v. Celso, 864 S.W.2d 652 (Tex. App.—Tyler 1993, no writ); Welder v. Welder, 794 S.W.2d 420 (Tex. App.—Corpus Christi 1990, no writ). § 8:217. Commingled property, 2 Tex. Prac. Guide Family Law § 8:217.

Personal Liability

With regard to personal liability, like credit card and other unsecured debt, a person is liable for debts incurred by such person’s spouse only where (1) one spouse acts as agent for the other, or (2) the debt was for necessaries. Tex. Fam. Code Ann. § 3.201. Moreover, a spouse does not act as agent for the other spouse solely because of the marriage relationship. Id.

Copyright 2018, Ian Ghrist, All Rights Reserved.

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.

Overview of the Bankruptcy Process for Real Estate Lenders

The bankruptcy process is much more complex for lenders than it is for landlords. To understand bankruptcy essentials for lenders, it helps to understand some basic concepts. There are three main types of bankruptcies that can be filed: (1) Chapter 7, (2) Chapter 13, and (3) Chapter 11. Chapter 7 bankruptcies are liquidation bankruptcies. In a liquidation bankruptcy, all of the debtor’s non-exempt assets will be sold off and the bankruptcy court will grant the debtor a discharge of all remaining unsecured debt. Liquidation is generally the simplest and easiest bankruptcy, but in the United States, it is rarely available for wage-earners. Congress created wage-earner consumer bankruptcy repayment plans in order to ensure that people who earn income are not able to run up substantial debt and then discharge it without making an attempt to pay the debt off using their disposable income. Congress adopted wage-earner plans with Chapter XIII in the Chandler Act of 1938, which became the modern-day Chapter 13 in the Bankruptcy Reform Act of 1978. In a Chapter 13 wage-earner plan, the debtor must devote the debtor’s disposable income toward the repayment of unsecured debts over the course of the next three to five years of the debtor’s life before receiving a discharge of remaining debts. Chapter 11 bankruptcies are more complicated. Chapter 11 is generally used in business bankruptcies rather than in consumer bankruptcies.

In a typical bankruptcy, the bankruptcy begins with the debtor filing a new bankruptcy case. The debtor’s law firm will send notice of the bankruptcy filing to all creditors. Soon after the case is filed, the debtor will file financial schedules. These schedules will list all of the debtor’s assets and liabilities. The debtor will also file a proposed bankruptcy plan. The plan will address how each creditor will be paid in the bankruptcy.

On the day that the debtor files a bankruptcy case, an automatic stay of all collections activities by creditors goes into effect. This “automatic stay” is the equivalent of a federal court order directed to all creditors telling them to stop their collections efforts, including foreclosure on collateral. Creditors must comply with the automatic stay or face serious penalties.

Real estate lenders often hire bankruptcy attorneys for the following purposes: (1) objecting to court confirmation of a debtor’s bankruptcy plan when the debtor’s treatment of the secured creditor’s claim in the plan is wrong or unfair, and (2) filing motions for relief from the automatic stay so that the creditor can foreclose on the creditor’s collateral. This article is primarily focused on providing information about these two issues for which a creditor will likely seek legal counsel.

Objections to Plan Confirmation

In a Chapter 13 wage-earner bankruptcy, the debtor who files bankruptcy is responsible for filing a proposed bankruptcy plan. The plan will state how the debtor proposes to pay his creditors over the next three to five years. The Chapter 13 trustee will review this plan to determine whether it complies with the bankruptcy rules, but the creditors must also review the plan to make sure that the plan treats the creditors fairly and correctly under the law. If the creditor’s treatment in the plan is wrong, then the creditor needs to file a written objection to the plan in the bankruptcy court. The creditor’s objection will then be taken up by the Court at the plan confirmation hearing. If the creditor fails to object before the plan confirmation hearing occurs, then the creditor might be stuck with wrong or unfair bankruptcy treatment because the bankruptcy courts are loathe to change the plan after it has been confirmed, at least on a creditor’s motion. The trustee, on the other hand, can and frequently does ask for plan modifications throughout the bankruptcy process.

The debtor bears the burden of proof on plan confirmation hearings. In re Colston, 539 B.R. 738, 746 (Bankr. W.D. Va. 2015) (“The debtor bears the burden of proof at confirmation, including as to good faith.”). Accordingly, the creditor can object without having to prosecute a motion on the objection. However, the creditor’s failure to object may bind the creditor even where the debtor’s plan should not have been approved unless the debtor proposed the plan with fraudulent intent, a substantially higher standard than mere good faith. Reasons to object to a plan include good faith, valuation, treatment of a particular claim, lack of adequate protection, and feasibility, among other reasons. “A debtor bears the burden of proof on the issue of valuation under 11 USC § 506(a).” Weichey v. NexTier Bank, N.A. (In re Weichey), 405 B.R. 158, 164 (Bankr. W.D. Pa. 2009); also see In re Finnegan, 358 B.R. 644, 649 (Bankr. M.D. Pa. 2006).

Term of Plan. The bankrupt debtor may not propose a plan for payments over a period of three years, unless the Court, for cause, approves a longer period, but the court may not approve a period that is longer than five years. In re Hussain, 250 B.R. 502, 508 (Bankr. D.N.J. 2000).

Loans on the Debtor’s Principal Residence May Not be Modified in Bankruptcy. Under 11 USC § 1322(b)(2), a Chapter 13 bankruptcy plan may “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence.” Real estate investors with an owner-financed, residential portfolio should take particular notice of this provision. The creditor on a residential mortgage should receive its payments even between the filing date and the plan confirmation date. Perez v. Peake, 373 B.R. 468, 487 (S.D. Tex. 2007). Under the Nobelman case, the debtor cannot bifurcate secured and unsecured portions of the holder of a principal residence lien. Collier on Bankruptcy P 1322.06 (16th 2017); Nobelman v. Am. Sav. Bank, 508 U.S. 324, 332, 113 S. Ct. 2106, 2111 (1993). Accordingly, such lien cannot be modified unless the lien is “completely undersecured” or “wholly unsecured,” which becomes an issue with second liens on principal residences. McDonald v. Master Fin., Inc. (In re McDonald), 205 F.3d 606, 610 (3d Cir. 2000). See the section below on “lien stripping” for more information on this issue.

Entitlement to Payment in Equal Monthly Installments Rather Than Pro Rata. Under 11 USC § 1325(a)(5)(B)(iii), the Chapter 13 plan must provide for payments to secured creditors in “equal monthly amounts.” Sometimes, debtors will list payments to the secured creditor as “Pro-Rata” in the plan. This amorphous term generally means that payments will be made to the creditor by priority pro rata with the creditor’s interest. Knowing exactly how payments will be made under pro rata treatment is difficult. The creditor may need to call the trustee’s office to ask how the trustee will apply payments under pro rata treatment. When reading a bankruptcy plan, the starting month for payment typically means the month following the case filing date, not the month following the plan confirmation date, unless otherwise specified.

What If I Fail to Object to Plan Confirmation? “The provisions of a confirmed plan bind the debtor and each creditor . . . .” 11 USC § 1327(a). There are lots of exceptions now to the common law rule that liens pass through bankruptcy unaffected. Johnson v. Home State Bank, 501 U.S. 78, 84 (1991) (“[A] bankruptcy discharge extinguishes only one mode of enforcing a claim—namely, an action against the debtor in personam—while leaving intact another—namely, an action against the debtor in rem.”); Farrey v. Sanderfoot, 500 U.S. 291, 297 (1991) (“Ordinarily, liens and other secured interests survive bankruptcy.”); also see 11 USC § 506(d)(2). If the creditor fails to object to the debtor’s treatment of the creditor in the plan, then the creditor probably loses the objection even if the objection would have succeeded. See In re Patterson, 107 B.R. 576, 579 (Bankr. S.D. Ohio 1989). But, there are limits. For example, “A secured creditor is . . . not bound by a plan which purports to reduce its claim where no objection [to the creditor’s secured claim] has been filed.” In re Howard, 972 F.2d 639, 641 (5th Cir. 1992). If the debtor tries to “challenge the amount of a secured claim either by asserting a counterclaim or offset against it or by disputing the amount or validity of the lien” then the debtor “must file an objection to the creditor’s claim in order to put the creditor on notice that it must participate in the bankruptcy proceedings.” Id. The debtor cannot dispute the amount or validity of the creditor’s claim solely by plan confirmation even where the creditor fails to raise a meritorious objection to the plan. On the other hand, “where the plan treats the secured claim in a fair and equitable manner, providing for full payment of the debt,” then the creditor probably waives objections to plan confirmation by failing to raise them prior to confirmation. In re Pence, 905 F.2d 1107, 1110 (7th Cir. 1990). To revoke the plan, the creditor must show that the debtor had “fraudulent intent” and the motion to revoke the plan must be brought as an adversary proceeding. 11 U.S.C.S. § 1330; USCS Bankruptcy R 7001. So, to confirm the plan, the debtor need only show good faith (11 USC § 1325(a)(3)), but to revoke the plan, the creditor must show fraud (11 USC § 1330). In Pence, the debtor proposed to give property different from the creditor’s collateral to the creditor to satisfy the creditor’s claim. The Court allowed this when the creditor failed to object to plan confirmation. The difference between Pence and Howard appears to be that in Pence the debtor supported the plan proposal with an appraisal supporting the debtor’s allegation that the creditor would receive full value for the creditor’s claim, even though such allegation turned out to be false, but was not made with fraudulent intent on the debtor’s part. Also see for a reconciliation of caselaw. The bankruptcy code provides for modification of plans after confirmation, generally due to changed circumstances, but not on the motion of a secured creditor. 11 USC § 1329. Also see In re Dominique, 368 B.R. 913, 919 (Bankr. S.D. Fla. 2007) (saying that wrongful modifications through the plan cannot result in a discharge).

Cure of Pre-Petition Arrearage. The debtor can pay off pre-bankruptcy arrearage over a “reasonable time,” typically six to twelve months. 11 U.S.C.S. § 1322(b)(5) (the plan can “provide for the curing of any default within a reasonable time . . . .”). The debtor’s cure prevents acceleration of the debt and can be made even on a principal residence. 8-1322 Collier on Bankruptcy P 1322.09 (16th 2017).  “A long-term debt dealt with by the chapter 13 plan in the manner authorized under section 1322(b)(5) is excepted from any discharge granted under section 1328, and the creditor’s lien remains intact, except to the extent it may have been declared void pursuant to section 506(d).” Id. This section can be used to cure post-petition defaults as well as pre-petition defaults, so the debtor can propose a modified plan that would cure postpetition mortgage payments that the debtor falls behind on during bankruptcy.  In re Mendoza, 111 F.3d 1264, 37 C.B.C.2d 1691 (5th Cir. 1997); In re McCollum, 17 C.B.C.2d 431, 76 B.R. 797 (Bankr. D. Or. 1987); In re Simpkins, 6 C.B.C.2d 1081, 16 B.R. 95 (Bankr. E.D. Tenn. 1982); Green Tree Acceptance v. Hoggle (In re Hoggle), 12 F.3d 1008, 1010 n.3 (11th Cir. 1994). A debt cured under § 1322(b)(5) is excepted from discharge under § 1328 and the creditor’s lien remains intact, unless the lien has been declared void under § 506(d). 8-1322 Collier on Bankruptcy P 1322.09 (16th 2017); 11 U.S.C. § 1328(a)(1), (c)(1); 11 U.S.C § 506(d); see also In re Gilbert, 472 B.R. 126 (Bankr. S.D. Fla. 2012); In re McGregor, 172 B.R. 718 (Bankr. D. Mass. 1994).

Debtor Can Either Pay Secured Claim Off in the Plan Under § 1325(a)(5) or Cure Under § 1322(b)(5). If the debtor proposes a plan that provides the holders of allowed secured claims an amount not less than the allowed amount of the claim, then the debtor does not need to cure under § 1322(b)(5). In re Chappell, 984 F.2d 775, 779 (7th Cir. 1993). “The Bankruptcy Code does not authorize a chapter 13 debtor to cure defaults and simultaneously modify secured claims. Instead, the Code permits a chapter 13 debtor to propose a plan that utilizes one or the other of these two options.” In re Hussain, 250 B.R. 502, 507 (Bankr. D.N.J. 2000). A “Debtor has two choices for treating the secured mortgage debts in his chapter 13. First, Debtor may modify the rights of the Lenders by reducing the interest rates from the original contract rate, but in order to do so, Debtor must provide for full payment of the allowed secured claims within the life of his chapter 13 plan. The other alternative is for Debtor to cure all pre-petition defaults through his five year plan and reinstate the original contracts by maintaining all future payments in accordance with the original terms of the mortgages.” Id. at 511.

What is a Reasonable Time to Cure Arrearages? Six months is probably considered a reasonable time to cure. In re Hence, 358 B.R. 294, 302 (Bankr. S.D. Tex. 2006). One court has said that “a reasonable time would ordinarily be between three and six months, and perhaps in extraordinary circumstances, nine or twelve months.” In re Hailey, 17 B.R. 167, 168 (Bankr. S.D. Fla. 1982).

Interest on Arrearages. Congress has substantially curbed charging of interest-on-interest, specifically with regard to pre-petition arrearages to be cured in the plan. In re Hence, 358 B.R. 294, 305-06 (Bankr. S.D. Tex. 2006); 11 USC § 1325(a)(5), § 1322(e) (overruling Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993)).

Acceleration After Bankruptcy. When the bankruptcy ends, the creditor should re-accelerate the debt rather than rely on the prior acceleration. Federal Nat’l Mortg. Ass’n v. Miller, 123 Misc. 2d 431, 473 N.Y.S.2d 743 (Sup. Ct. 1984); 8-1322 Collier on Bankruptcy P 1322.09 (16th 2017).

Direct Pay Versus Paid Through the Trustee. Often arrearages are paid through the trustee while post-petition payments are made directly to the creditor. 8-1322 Collier on Bankruptcy P 1322.09 (16th 2017). This can save the debtor substantial money on trustee’s percentage fees given that the mortgage is often one of the largest payments. Perez v. Peake, 373 B.R. 468, 478 (S.D. Tex. 2007) (discussing debtor’s interest in avoiding trustee’s fees as a percentage of disbursements); First Bank & Tr. v. Gross (In re Reid), 179 B.R. 504, 508 (E.D. Tex. 1995) (“The Fifth Circuit expressly permits debtors to act as disbursing agents . . . . However, the decision to permit a debtor to act as his own disbursing agent is left to the discretion of the bankruptcy judge.”).

Cram Down Versus Non-Cram-Down. Generally, the debtor’s bankruptcy plan will categorize secured claims by listing them in a “Cram-Down” section or a non-cram-down section of the plan. The cram-down claims will have the terms of the claim altered, whereas the non-cram-down claims will not have the terms of the claim altered. The purpose of listing the claims separately is to make it easy for the creditor reading the plan to figure out whether to object or not. The creditor whose claim is listed in the non-cram-down section of the plan will rarely need to object. The cram-down creditors, however, may want to object for myriad reasons because their claims have been modified by the debtor.

Till Rates on Cram Down Claims. The Till rates are also referred to as the cram down rates because they change the contract terms without the creditor’s consent. Non-primary-residence loans must be paid out at the Till rates, which are the prime rate plus 1% to 3%. Till v. SCS Credit Corp., 541 U.S. 465, 480, 124 S. Ct. 1951, 1962 (2004). If the debtor proposes zero percent, then the creditor should object. Under 11 USC § 1325(a)(5)(B)(ii), the Chapter 13 plan must, for a secured creditor, provide property to be distributed to the creditor that “has a total ‘value, as of the effective date of the plan,’ that equals or exceeds the value of the creditor’s allowed secured claim.” Till, 541 U.S.  at 474. When the Chapter 13 plan does not provide for a lump sum payment to the secured creditor, then “the amount of each installment must be calibrated to ensure that, over time, the creditor receives disbursements whose total present value equals or exceeds that of the allowed claim.” Id. at 469. Surprisingly, the Supreme Court determined that the contract rate has no bearing on this inquiry, though four justices in a plurality opinion thought that the contract rate should be presumptively be the plan rate. Id.

Lien Stripping. When a secured creditor receives a lien-stripping notice, it is time to call a creditor’s bankruptcy attorney. When a debtor alleges that a creditor is fully or partially undersecured, then the debtor may try to strip off the lien and have the lien voided altogether or may try to strip down the lien to the value of the property. Bank of Am., N.A. v. Caulkett, 135 S. Ct. 1995 (2015); 11 USC § 506(d). Depending on the jurisdiction that the case is located in, strip-off or strip-down may require the filing of an adversary action (which is like a separate lawsuit handled within the bankruptcy case involving heightened pleading and notice requirements) or merely handled through the plan confirmation process.

“A debtor bears the burden of proof on the issue of valuation under 11 USC § 506(a).” Weichey v. NexTier Bank, N.A. (In re Weichey), 405 B.R. 158, 164 (Bankr. W.D. Pa. 2009); also see In re Finnegan, 358 B.R. 644, 649 (Bankr. M.D. Pa. 2006). Moreover, mortgagees are entitled to due process before their constitutionally-protected security interests are removed. See generally Mennonite Bd. of Missions v. Adams, 462 U.S. 791, 798 (U.S. 1983); Eric S. Richards, Due Process Limitations on the Modification of Liens Through Bankruptcy Reorganization, 71 Am. Bankr. L.J. 43, 45–46, 50 (1997). When a debtor tries to void a creditor’s lien by 11 USC § 506(d), the debtor needs to give notice of its intention to do so. In re King, 290 B.R. 641, 648 (Bankr. C.D. Ill. 2003). If the creditor fails to object, then the bankruptcy court might not even make the debtor offer evidence on valuation at the plan confirmation hearing, despite the debtor’s burden of proof. Id. Debtor’s attorneys often use tax roll data for lien-stripping, but this is generally not proper or very poor valuation evidence. See Blakey v. Pierce (In re Blakey), 76 B.R. 465, 471 (Bankr. E.D. Pa. 1987) (“We note, however, that we would not admit into evidence the City’s admission, per its appraisal, that the value of the premises was $13,200 against the Mortgagee.”); also see In re Cole, 81 B.R. 326, 328-29 (Bankr. E.D. Pa. 1988) (“We are unwilling to give much, if any, weight to the City’s ‘appraisal of the premises . . . . We have even less indicia of what went into this determination than we do of Mr. Graham [an expert witness who testified regarding valuation].”). For additional authority, see 4-506 Collier on Bankruptcy P § 506.03 (16th ed.) (“[V]alue testimony by nonexperts is often viewed as unpersuasive, if not inadmissible.”). The proper way to offer valuation evidence of real estate is through an appraisal. Cf. Nationsbanc Mortgage/Federal Nat’l Mortg. Ass’n v. Williams (In re Williams), 276 B.R. 899, 909 (C.D. Ill. 1999)

Does Lien-Stripping Require an Adversary Proceeding? “Allowing the debtor to avoid a lien through the Chapter 13 plan confirmation process would . . . be contrary to the clearly expressed intent in the Code to prevent modification of rights of lien holders through a Chapter 13 plan when those parties have mortgages secured by the debtor’s principal residence.” In re Forrest, 424 B.R. 831, 834 (Bankr. N.D. Ill. 2009). Moreover, “It is the position of some courts that the avoidance of a lien envisioned by § 506 must be implemented through an adversary proceeding.” In re Nys, 2013 Bankr. LEXIS 93, 15 (Bankr. S.D. Ohio Jan. 8, 2013); see also Holderman v. Ben. Fin. I, Inc. (In re Holderman), 2011 Bankr. LEXIS 5707, 6 (Bankr. N.D. Ind. Dec. 20, 2011); Weichey v. NexTier Bank, N.A. (In re Weichey), 405 B.R. 158, 159 (Bankr. W.D. Pa. 2009) (debtors used an adversary proceeding to accomplish stripping under 11 U.S.C. § 506(a). “The majority of bankruptcy courts holds that a strip-off does not require an adversary proceeding.” Comment: Strip-Off: What is the Correct Procedure to Avoid a Wholly Unsecured Junior Mortgage?, 28 Emory Bankr. Dev. J. 463, 465 (2012). “Alternatively, the minority of bankruptcy courts holds the opposite view and requires an adversary proceeding pursuant to Rule 7001(2).” Id. As late as 2012, “no circuit courts [had] addressed the issue.” Id. at 407. The minority approach is supported by sound arguments, for example, “the plain language of Rule 7001 indicates that it applies to strip-off.” Id. at 504. Also, “Using an adversary proceeding [for lien stripping] may better address due process concerns because of the more formality of the process with a summons issued and the complaint served in accordance with F.R.B.P. 7004.” Giddens, Joel, Practical Considerations in Lien Stripping, p. 91, Third Annual Memphis Consumer Bankruptcy Conference, (American Bankruptcy Institute June 7, 2013). Lien-stripping in the Southern District of Texas does not require an adversary proceeding. Hardy Rawls Enters. LLC v. Cage (In re Moye), No. H-09-2747, 2010 U.S. Dist. LEXIS 83792, at *18 (S.D. Tex. 2010) (suggesting that the Southern District of Texas may follow the majority approach).

Filing for Relief from Stay

Secured creditors can ask the bankruptcy court to lift the automatic stay as to their collateral or to afford them “relief” from the automatic stay. This is commonly referred to as a “lift stay motion.” Secured creditors can file lift stay motions for “cause.” 11 U.S.C. § 362(d)(1). The most quintessential lift stay situation would be where a secured creditor wants to foreclose on real estate collateral, but cannot do so because the automatic stay of all collections activities in the bankruptcy case prevents this. The stay is called “automatic” because it arises automatically, without the bankruptcy court even having to sign an order, as soon as the bankruptcy case is filed. So, the creditor files a motion, in the federal bankruptcy court, to have the stay lifted so that the foreclosure can proceed in accordance with applicable state law. Foreclosure law and debtor-creditor law varies from state-to-state, but bankruptcy law is federal and bankruptcies are filed in federal court. Under the Supremacy Clause to the U.S. Constitution, the federal automatic stay of collections activities supersedes any state law to the contrary. Our founding fathers felt that the need for uniform bankruptcy law throughout the country was so important that the federal court’s bankruptcy powers come from Article 1, Section 8 of the U.S. Constitution, which are the few, original limited powers granted to the federal government.

When to File for Relief from Stay. Generally, if you have a secured debt and you are not being paid, then you will want to file for relief from the automatic stay. The reason for the general rule is that “a monthly payment to the mortgagee equal to the full contractual amount constitutes adequate protection under § 361(3) and . . . any lesser amount is inadequate protection.” In re Perez, 339 B.R. 385, 400 (Bankr. S.D. Tex. 2006) (“[I]t is incongruous to bless adequate protection payments to Chapter 13 residential lien holders in any amount less than the contractual amount required by the promissory note as the routine method to be adopted for adequate protection. To do so goes against the express intent of Congress. The only way to satisfy congressional intent is to use the flexible concept of “indubitable equivalent” and hold that making the contractual monthly payment constitutes an indubitable equivalent under 11 U.S.C. § 361(3).”). This general rule is very general, with myriad exceptions, because whether or not a motion for relief from stay will be granted is rarely clear. The stay can be lifted or modified for “cause,” and bankruptcy courts have significant discretion over what constitutes “cause.”

“Section 362(d)(1) of the Bankruptcy Code provides that the Court may lift the automatic stay for ‘cause.’ See 11 U.S.C. § 362(d)(1). However, the Bankruptcy Code does not define the term ‘cause,’ and the term is applied by the courts on a case specific basis. See Claughton v. Mixson, 33 F.3d 4, 5 (4th Cir. 1994) (“Because the Bankruptcy Code provides no definition of what constitutes ’cause,’ the courts must determine when discretionary relief is appropriate on a case-by-case basis.”) (citations omitted); Christensen v. Tucson Estates, Inc. (In re Tucson Estates, Inc.), 912 F.2d 1162, 1166 (9th Cir. 1990) (“‘Cause’ has no clear definition and is determined on a case-by-case basis.”) (citations omitted); Hudgins v. Security Bank of Whitesboro (In re Hudgins), 188 B.R. 938, 946 (Bankr. E.D. Tex.1995) (“[T]he Bankruptcy Code does not define the term ’cause.’ ‘Cause’ under § 362(d)(1) is not limited to those situations where the property of a party lacks adequate protection in the bankruptcy estate. Instead ’cause’ encompasses many different situations . . . .”) (citations omitted); In re Texas State Optical, 188 B.R. 552, 556 (Bankr. E.D. Tex. 1995) (“11 U.S.C. § 362(d)(1) provides for the modification of the automatic stay for cause. ‘Cause’ as used in § 362(d)(1) has no clear and limited definition and, therefore, is determined on a case by case basis. ‘Cause’ is an intentionally broad and flexible concept that permits the Bankruptcy Court, as a court of equity, to respond to inherently fact-sensitive situations.”) (citations omitted); cf In re Novak, 103 B.R. 403, 411-12 (Bankr. E.D.N.Y. 1989) (finding in a Chapter 12 case, debtor’s failure  [*47] to timely confirm plan is “cause” for relief from automatic stay, despite the existence of an equity cushion).” In re Futures Equity L.L.C., Nos. 00-33682-BJH-11, 00-34825-BJH-11, 00-34826-BJH-11, 2001 Bankr. LEXIS 2229, at *45-47 (Bankr. N.D. Tex. 2001).

We do, however, know some things about what constitutes cause. A lack of good faith may constitute sufficient cause to provide relief from the automatic stay. In re Haydel Props., LP, No. 16-51259-KMS, 2017 Bankr. LEXIS 842, at *6 (Bankr. S.D. Miss. 2017). Many lift stay motions generally allege a lack of good faith as grounds for relief. Also, failure to comply with the terms of the plan constitutes cause for relief from stay. In re Patterson, 107 B.R. 576, 579 (Bankr. S.D. Ohio 1989); 11 USC § 362(d)(1). If the creditor obtains the trustee’s record, showing the debtor to be in arrears, then that constitutes cause for relief from stay. Id. If the plan makes provision for payment of the creditor’s claim, then issues of lack of adequate protection are res judicata as of confirmation of the plan. Patterson, 107 B.R. at 578. This is true even where the creditor’s adequate protection objection “probably would have succeeded.” Id. An equity cushion alone can be adequate protection. Bank R.I. v. Pawtuxet Valley Prescription & Surgical Ctr., 386 B.R. 1, 5 (D.R.I. 2008). Anything less than a ten-percent equity cushion is probably inadequate and even ten-percent has been adequate only where the debtor proposed monthly payments to cover interest accruing on the claim. Id. at 10; Also see Skelton v. Urban Tr. Bank (In re Skelton), Nos. 12-34350, 12-3184, 2013 Bankr. LEXIS 3137, at *30 (Bankr. N.D. Tex. 2013). A twenty-percent equity cushion is more likely to obviate any need to provide additional adequate protection. In re Haydel Props., LP, No. 16-51259-KMS, 2017 Bankr. LEXIS 842, at *1 (Bankr. S.D. Miss. 2017). Using cash collateral to pay administrative claims without providing additional security to the creditor may be grounds for relief from the automatic stay. In re Geijsel, 480 B.R. 238, 272 (Bankr. N.D. Tex. 2012).

Contents of an Order Modifying the Automatic Stay. Most lift stay motions result in the entry of an agreed order modifying the automatic stay rather than an order lifting the stay. The contents of such agreed orders vary, but can typically include: (1) a warning regarding the applicability of 11 USC § 109(g), (2) provisions for cure of arrearage, (3) provisions regarding tax and insurance issues, particularly on non-escrowed loans, (4) provisions regarding default on the modified stay order and automatic lifting of the stay in the event of default on the order, (5) notice provisions to the debtor or debtor’s counsel to advise of default on the order and lifting of stay, (6) provision that the order will survive a conversion of the case to another chapter of the Code, and (7) provision that the terms of the order no longer apply upon dismissal of the case, (8) provision that a non-sufficient funds check does not constitute a timely payment, (9) provision that any default on trustee payments constitutes a default on the modified stay order, and (10) provision for modifying the plan to cure arrearages and attorney’s fees related to the lift stay motion, inter alia.

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Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.